HRT 3740- Ch.11-13 Practice Questions
You have just recieved an extra $5,000. You could invest this extra money at 5% or you pay off an outstanding credit card balance that charges 14% interest. If you pay off the outstanding credit card balance, what is the effective annual savings? Should you retire the debt? a)$700, do not retire the debt. b)$700, Yes retire the debt c)$1400, do not retire the debt d)$2100, Yes retire the debt
5,000 x .05 = 250 5,000 x .14= 700 Effective annual savings: cash is increased(less money being drained to this debt) You should retire the debt(700>250). b)$700, Yes retire the debt C1, p. 503
Stephanie Plante, the owner of the Schuster Ranch, is considering a lockbox system for some of her accounts receivables collections. She can program her computer to send statements with different return addresses depending on the amount of the balance. The bank charges $.15 per item for lockbox service. Stephanie can invest cash with the bank at an annual interest rate of 4%. She has estimated that using the lockbox would speed up collections by 3 days. What the break-even amount that is, the amount at which Stephanie Plante would be indifferent as to whether a customer sent the check directly to the inn or the post office lockbox? a)$112.50 b)$125.00 c)$500.00 d)$625.25
B= C/I x T: Breakeven = ((Charge amt/Interest rate/# of days in a yr.)x time) B = .15/((.04/365) x 3) =.15/(.0001 x3)=500 c)$500.00 (* C5, p. 521 of the sixth edition, C4, pp. 528 - 530 of the 7th edition)
Through increased collection efforts and various disbursement techniques, the Sleeping Beauty Castle is able to effectively hold on to its cash for four days longer than in the past. The impact is that its average cash balance has increased from $4,000 to $9,000. What is the additional value of this increased cash balance, assuring it is invested at 5% interest?
Cash balance: 9,000(new)-4,000(old)=5,000 5,000 x .05(interest rate)= $250 due to investment
A hotel purchases a piece of equipment for $5,000 and is offered terms of 2/10, n/30. What is the effective interest rate of the cash discount? a)33.3% b)36.5% c)37.2% d)40%
EIR= cash discount/invoice amount-cash discount x days in a year/difference between end of discount period and final due date cash discount = invoice amount x discount rate: $5000 x .02=100 100/5000-100 x 365/30-10= 100/4900 x 365/20= 5/4900 x 365=.372 or 37.2% c) 37.2%
The Hotel purchases a piece of equipment for $50,000 and is offered terms of 2/10, n/30. What is the effective interest rate of the cash discount?
EIR= cash discount/invoice amount-cash discount x days in a year/difference between end of discount period and final due date cash discount = invoice amount x discount rate:1000=50,000 x .02 1000/50,000-1,000 x 365/30-10= 1,000/49,000 x 365/20= 50/49,000 x 365= 18,250/49,000= 0.37 or 37.2%
The Roadside Inn borrowed $100,00 for two years at an annual interest rate of 10% from a bank that required a $20,000 compensating balance. What was the effective interest rate for the loan? a)10% b)12% c)12.5% d)14%
Effective interest rate(EIR)= loan x Annual interest on loan/Loan-compensating balance required 100,000 x .10/100,000-20,000= 10,000/80,000= .125 or 12.5% c)12.5%
The Lodge borrowed $2,000,000 for five years at an annual interest rate of 9% from the Merchant Bank, which required a $100,000 compensating balance. What was the effective interest rate for the loan?(rounded to the nearest tenth of one percent) a) 9.0% b)9.5% c)10.0% d)10.5%
Effective interest rate(EIR)= loan x Annual interest on loan/Loan-compensating balance required annual interest on loan: 9% compensating balance:$100,000 loan: $2,000,000 2,000,000 x .09/2,000,000-100,000= 180,000/1,900,000= .09(EIR) or 9% a)9.0%
On your 25th birthday your Aunt Min-ah tells you that she has set up a trust fund that will pay you $1,000,000 when you turn 65. If the relevant annual discount rate is 6 percent, how much is this fund worth today(rounded to the nearest one thousand dollars) a)$23,000 b)$32,000 c)$97,000 d)$152,000 e)$792,000
FV=$1,000,000 N=40 1/YR=6% note: c-mem + 1= time value clear up arrow + C + 0=cash flow clear 97,222.19 which is rounded to 97,000 c)$97,000(Present value lump sum, see Appendix D handout, class discussions)
The manager of the Uptown Restaurant has excess cash from operations to invest over a two-year period. If the manager wants the two-year investment to yield a total of $10,000, how much cash must be invested today at an interest rate of 10%? a)$7,500 b)$8,000 c)$8,265 d)$9,091
FV=10,000 N=2 I/YR=10% $8,264.46 rounded to $8,265 c)$8,265 (C3: 638-645)
11. As the hotel controller, you have been asked by the general manager to advise her as to which project the hotel should undertake—Project A or Project B. The two projects are mutually exclusive, so the hotel can only do one of them. Relevant information with respect to the two projects is as follows: Project A Project B Project Cost Payback Period $30,000 2.33 years $20,000 2.60 years Excess Cash Flow $5,000 $15,000 Net Present Value $10,986 $15,833 Note: Excess Cash Flow refers to cash flow generated beyond the payback period. Net Present Value is of all cash inflows and outflows related to the project. a)Select Project B because it costs less to complete Project A b)Select Project A because it has a shorter payback period than Project B c)Select Project B because the net present value of all cash inflows and outflows is greater than that of Project A d)Both Project A and Project B are equally desirable because they both generate excess cash flow.
Figure out how to do this one tomorrow
When you opened up the mail today, you received a check of $30,000. If you invest the entire amount at 7.5% compounded annually for seven years, what is the future value of the money? a)$18,082.65 b)$31,337.37 c)$35,717.93 d)$40,064.08 e)$49,771.47
PV=$30,000 N=7 1/YR=7.5% then use the financial calculator by entering the information note: c-mem + 1= time value clear up arrow + C + 0=cash flow clear e)$49,771.47 (why does it show negative on calculator ask professor)
Ricardo's Restaurant has the opportunity to invest $5,000 at an annual interest rate of 10%. What would be the value of the $5,000 at the end of two years? a)$5,060 b)$5,500 c)$6,000 d)$6,050
PV=$5000 N=2 1/YR=10 d)$6,050 (C3: 638-645)
A project with a projected 6-year life would cost $100,000. Its annual cash flows would be $40,000, while its annual income flows would be $30,000. The payback period would be ______ years. a)2 b)2.5 c)3.33 d)6
Payback Period= Project Cost/Annual Cash Flow 100,000/40,000=2.5 b)2.5
8. The manager of a family restaurant is considering a renovation investment that would expand the operation's menu offerings. Given the following information, what is the payback period for the proposed investment? Project Cost $36,000 Salvage -0- Annual Cash Flow $11,250 Average Investment $18,000 Average Annual Project Income $10,800 a)2.0 years b)3.2 years c)3.3 years d)5.3 years
Payback Period= Project Cost/Annual Cash Flow 36,000/11,250=3.2 b) 3.2 years. (C5: 646-655)
According to the rule of 72, if you invest at $10,000 at 8% how long will it take until you have $40,000. a) 8 years b)9 years c)18 years d)27 years
Rule: To find the number of yrs needed to double the money divide interest rate by 72. so $10,000 x 2=20,000 and 72/8 is 9 but you need 40,000 20,000 x 2=40,000 and 72/8= 9 SO 9x2(since you double the amt. twice)-18 yrs c)18 years (*class discussions 9 years X 2)
Which of the following is not an effective procedure for controlling cash receipt? a)Cash receipts should be used to pay invoices and incidental expenses b)Cash receipts should be deposited daily c)Cash received should be given to the general cashier as soon as it is practical d)Restrictive endorsements should be stamped on checks as they are received
a) Cash receipts should be used to pay invoices and incidental expenses. (C4: 598-610)
___________________ is a stream of funds provided by a capital investment when the amounts provided are the same and at equal intervals(such as the end of the year). a)Annuity b)Capital rationing c)Hurdle rate d)Time value of money
a)Annuity This was discussed in the Chapter Key Terms. See Chapter 13 - page 610 in the 7th edition and page 640 in the 8th edition.
Which of the following refers to limiting funds for capital projects, regardless of the expected profitability of the project? a)capital rationing b)incremental capital budgeting c)Payback budgeting d)Internal return budgeting
a)Capital rationing. (*C5, pp. 607-608 of the sixth edition, C6, p. 626 of the 7th edition)
Which of the following is not an effective inventory control procedure? a)Storage employees should maintain inventory records b)Adjustments to inventory records must be approved by the controller c)Storage and production staff should be required to leave the facility by an exit that is easily observed by managers d)Inventories and usage rates of high-priced items should be monitored daily
a)Storage employees should maintain inventory records. (C4: 598-610)
Management must consider the costs and benefits of internal control policies. A "perfect" system- one that guarantees the safety of assets- would probably be cost prohibitive. a)True b)False
a)True This was discussed in the Chapter Summary. See Chapter 12 - pages 589-590 in the 7th edition and page 619 in the 8th edition.
The Internal Rate of Return(IRR) approach sets the Net Present Value(NPV) equal to zero and calculates the discount rate. However, when mutually exclusive projects are analyzed, the NPV method is preferred over the IRR. a)True b)False
a)True This was discussed in the Chapter Summary. See Chapter 13 - pages 629-630 in the 7th edition and pages 658-659 in the 8th edition.
Which of the following types of hospitality operations is most likely to use an integrated cash management system? a)a multi-unit operation b)a hotel with several point-of-sale outlets c)a lodging operation organized as a sole proprietorship d)a restaurant organized as a limited partnership
a)a multi-unit operation (C7: 568-569)
Which of the following is a major source of information for preparing a cash budget? a)current operations budget b)balance sheets from at least two previous periods c)income statements and balance sheets from at least two previous periods d)statements of cash flows from at least two previous periods
a)current operations budget (C3: 546-556)
Which of the following is not an objective of an internal control system? a)developing managerial policies b)safeguarding assets c)promoting operational efficiency d)checking the accuracy of accounting data
a)developing managerial policies. (C2: 589-592)
The time between the subtraction of cash from a hospitality company's books and the actual subtraction of cash from the company's bank account is called: a)payment float b)collection float c)cash float d)net float
a)payment float (C4: 557-562)
Which of the following factors would managers rightly ignore when investing excess cash? a)the reason for the excess cash flow b)the amount of time for which the funds are to be invested c)the rate of return on investment d)the cost of brokerage services
a)the reason for the excess cash flow (C2: 545-546)
Which of the following factors is not considered by the payback model of capital budgeting? a)time value of money b)equal annual cash flows c)unequal annual cash flows d)project cost
a)the time value of money. (C5: 646-655)
The capital budgeting method that uses a hurdle rate is the _______________ method a)internal rate of return b)payback c)net present value d)accounting rate of return
a. internal rate of return. (C5: 646-655)
The ____________________ method to cash budgeting is most useful for short-term periods because the estimates upon which it is based are less reliable the further the projections are made into the future. a)Adjusted net income b)Cash receipts and disbursements c)Integrated cash d)Lockbox
b) Cash receipts and disbursements This was discussed in the Chapter Summary. See Chapter 11 discussed on pages 517-518 of the 7th edition and pages 547-548 of the 8th edition. Also discussed in Key Terms - page 541 of the 7th edition and page 570 of the 8th edition.
Which of the following provides a concise overview of an operation's internal control system and enables managers to identify weaknesses for corrective action? a)internal control questionnaires b)flowcharts c)procedure manuals d)job manuals
b) Flowcharts. (C5: 610-615)
Which of the following managerial functions is primarily used to check the accuracy and reliability of accounting data? a)cash management b)internal control c)operations budgeting d)capital budgeting
b) internal control. (C2: 589-592)
Which of the following statements about income and cash is false? a)Even a highly profitable company can go bankrupt if it lacks cash b)A company can exist with negative cash flow indefinitely as long as it is earning a profit on the books c)A company needs cash whether it is profitable or not d)A company can typically operate effectively without income for longer than it can without cash
b)A company can exist with negative cash flow indefinitely as long as it is earning a profit on the books. (C2: 545-546)
_____________________ is the time between the subtraction or addition of cash to the company's books and the actual subtraction or addition to the company's account. a)Cash flow b)Float c)Imprest basis d)Trade credit
b)Float (*C5, Key Terms, p. 528 of the sixth edition, C4, Key Terms, p.542 of the 7th edition)
The Single Cash Flow equation has four parts. Which of the following best describes these four parts? a)Past value, present value,future value and discount rate b)Present value, future value, discount rate, and the life of the investment(aka number of years) c)Compound value, life of the investment, discount rate and historical rate d)None of the above
b)Present value, future value, discount rate, and the life of the investment (*class discussions, p.591 of the sixth edition, p. 609 of the 7th edition)
Which of the following most accurately describes one example of a preventive control and one example of a detective control? a)Bank reconciliations and authorization policies b)Separation of duties and external audit c)Mandatory vacations and a code of ethics d)External audit and separation of duties
b)Separation of duties and external audit (*p.572 in the sixth edition, p. 587 in the 7th edition, p. 618 in the 8th edition)
Which of the following is not an effective payroll control procedure? a)Departmental supervisors should approve all hourly employees' time reports b)The accounting employee responsible for payroll should reconcile the payroll statement from the bank. c)Employees independent of the payroll department should distribute paychecks to employees d)Undelivered paychecks should be returned to the controller
b)The accounting employee responsible for payroll should reconcile the payroll statement from the bank. (C4: 598-610)
A capital budgeting model that does not consider cash flows is the ____________ model a)payback b)accounting rate of return c)net present value d)internal rate of return
b)accounting rate of return. (C5: 646-655)
Which of the following refers to the management of a hospitality's operation cash balances, cash flow and short-term investments in securities? a)internal control b)cash management c)capital budgeting d)operations budgeting
b)cash management (C1: 541-545)
Which of the following best describes the process of capital budgeting? a)forecasting revenues and expenses b)determining the amount to spend on fixed assets and which fixed assets to purchase c)determining a company's short term and long-term investments in securities d)limiting funds for capital improvements without considering the profitability of proposed projects
b)determining the amount to spend on fixed assets and which fixed assets to purchase (C2: 637-638)
Which of the following characteristics of internal control system are functioning properly? a)authorization procedures b)independent performance checks c)procedure manuals d)segregation of duties
b)independent performance checks. (C3: 592-598)
Within an internal control system, the primary purpose of segregating duties is to: a)information managers when goals are not being met b)prevent and detect errors and theft c)ensure that every business transaction is legitimate d)Restrictive endorsements should be stamped on checks as they are receive
b)prevent and detect errors and theft (C3: 592-598)
Which of the following internal control tools explains to employees how they should perform their jobs? a)organization charts b)procedure manuals c)job descriptions d)results from internal control questionnaires
b)procedure manuals (C3: 592-598)
In considering an equipment purchase, a decision maker should focus on a)total cash flow b)incremental cash flow c)total operating results d)incremental operating results
b. incremental cash flow. (C2: 637-638)
The physical controls of an internal control system are primarily meant to: a)encourage adherence to managerial policies b)promote operational efficiency c)safeguard the operation's assets d)maintain the reliability of accounting data
c) safeguard the operation's assets. (C3: 592-598)
Which of the following cashier functions is not an effective procedure for controlling cash? a)Cashiers should verify the amounts of cash banks when they receive and sign for them b)Cash sales should be rung up as they are made c)Cashiers should authorize rebates and allowances for cash taken from their banks d)Cashiers should not be allowed to have briefcases, handbags, or purses while working at their stations.
c)Cashiers should authorize rebates and allowances for cash taken from their banks (C4: 598-610)
According to the textbook, what is the definition of preventative controls? a)Controls designed to discover problems b)Controls designed to prevent problems after they have occured c)Controls implemented before a problem occurs d)Controls implemented to figure out who did the crime
c)Controls implemented before a problem occurs (*p.572 & p. Key Terms 576 in the sixth edition, p. 587 & p. Key Terms p. 591 in the 7th edition, p. 621 in the 8th edition)
Which of the following is not an effective procedure for controlling cash disbursements? a)Checks drawn in excess of a minimum amount should contain two signatures b)Vouchers, invoices, and other documents supporting cash disbursements should be canceled by stamping "PAID" when the check is signed c)Signed check and disbursement vouchers should be returned to the person who prepared the checks or vouchers d)Only those authorities to write checks should have access to blank checks.
c)Signed checks and disbursement vouchers should be returned to the person who prepared the checks or vouchers. (C4: 598-610)
Based on the information in problem 22, what happens to the present value if you decrease the discount rate? a)The present value decreases b)There is no change in the present value c)The present value increases
c)The present value increases. (ex: at 4% the calculation is $208,289.04) (Class discussions)
If a proposed capital project has an internal rate of return of 13% with a hurdle rate of 11%, what course of action is recommended? a)The hurdle rate should be recalculated using a different set of assumptions. b)The payback model should be used to further analyze the financial feasibility of the project c)The project should be accepted d)The project should be rejected
c)The project should be accepted (*C4, p. 604 of the sixth edition,C5 p. 621 of the 7th edition)
Which of the following is shown on a cash budget prepared using the cash receipts and disbursements approach? a)estimated revenues and expenses b)expected changes in current assets and liabilities c)the direct sources and uses of cash d)none of the above
c)the direct sources and uses of cash (C3: 546-556)
Which of the following approaches to cash budgeting is useful when forecasting for periods up to six months? a)FASB approach b)payback approach c)cash receipts and disbursements approach d)adjusted net income approach
c. cash receipts and disbursements approach. (C3: 546-556)
Which of the following capital budgeting models discounts future cash flows to their present value? a)payback model b)accounting rate of return model c)net present value model d)none of the above
c. net present value model. (C5: 646-655)
Please complete the following: Internal control is the overall system of protecting the establishment's assets. a)Ensuring the accuracy and reliability of its accounting records b)Promoting efficient operations c)Encouraging adherence to management policies d)All of the above e)only a. and c. above
d) All of the above This was discussed in the Chapter Summary. See Chapter 12 - pages 589-590 in the 7th edition and page 619 in the 8th edition.
Statement 1: The cost of maintaining excessive in-house cash or checking accounts is the opportunity cost. Statement 2: Transaction motive is the rationale for maintaining adequate balances in checking accounts to meet checks drawn on these accounts. a)Both statements are false b)Statement 1 is false and Statement 2 is true c)Statement 1 is true and Statement 2 is false d)Both statements are true
d)Both statements are true This was discussed as part of Competency #1 on pages 511- 515 of the 7th edition and pages 541-545 of the 8th edition. See Chapter 11- page 512 and Key Terms page 542 of the 7th edition and page 542 and Key Terms page 571 of the 8th edition.
Which of the following internal control tools diagrams the movements of documents through an organization? a)Procedure manuals b)Internal control questionnaires c)Organization charts d)Flow charts
d)Flow charts *p.565 in the sixth edition, p. 580 in the 7th edition, p. 620 in the 8th edition)
________________ is the change in cash flow of an operation that results from an investment. As a reminder, the capital budgeting process is used to maximize an operation's profits. a)Annuity b)Capital rationing c)Hurdle rate d)Incremental cash flow e)Time value of money
d)Incremental cash flow This was discussed in the Chapter Summary & Key Terms. See Chapter 13 - pages 629-630 in the 7th edition and pages 658-659 in the 8th edition.
______________ is an approach to evaluating capital budgeting decisions based on the number of years of annual cash flow generated by the fixed asset purchase required to recover the investment. a)Annuity b)Hurdle rate c)Net present value d)Payback
d)Payback. (* Key Terms p. 612 of the sixth edition, Key Terms p. 630 of the 7th edition)
_____________________ is the time between when a hospitality business writes a check(decreasing its cash on the books) and when the funds are actually deducted from the bank's business account. a)Collection float b)Imprest float c)Net float d)Payment float
d)Payment float This was discussed as part of Competency #4 on on pages 527- 532 of the 7th edition and pages 557-562 of the 8th edition. See Chapter 11 Key Terms- pages 541-542 of the 7th edition and pages 50-571 of the 8th edition.
Which of the following does not produce a decrease in cash? a)an increase in marketable securities b)an increase in accounts receivables c)an increase in inventories d)an increase in current liabilities
d)an increase in current liabilities. (C4: 557-562) side note: when you decrease liabilities you pay them off THUS that would be a decrease in cash
An accounts receivable clerk steals cash received on an account, then posts cash received the next day(for a different account) to the first account. This fraudulent practice is prevented by: a)independent performance checks b)adequate records c)physical controls d)segregation of duties
d)segregation of duties. (C4: 598-610)
Which of the following decisions is directly related to the capital budgeting process? a)projecting fixed charges b)forecasting revenue from operations c)forecasting cash flows from financing activities d)acquiring fixed assets to increase sales
d. acquiring fixed assets to increase sales. (C2: 637-638)
The owner or manager of a small hospitality operation should perform three of the following activities that are critical to internal control. Which one does the owner or general manager not need to perform to enhance internal control? a)opening all mail and listing cash receipts b)reconciling statements from the bank c)signing all checks d)making all entries in the general journal
d. making all entries in the general journal. making all entries in the general journal. (C6: 615-617)
Identify general characteristics of an effective system of internal control. a)Management leadership b)Sound practices & Organizational structure c)Fixed responsibilities and Segregation of duties d)Independent performance checks e)All of the above
e)All of the above (*p.548 in the sixth edition, p. 562 in the 7th edition, p. 592 in the 8th edition)
A disadvantage of the _______________ approach to capital budgeting is that it fails to consider the time value of money. a)Accounting rate of return b)Internal rate of return(IRR) c)Payback d)All of the above e)Only a. and c. above
e)Only a. and c. above (*C4 pp. 600-604 of the sixth edition, C5, pp. 617-626 of 7th edition)
In class and in the textbook six factors that management should consider when investing cash were discussed. Which one of the following is not one of these six factors? a)Cost b)Risk and return c)Time and liquidity d)Size e)Profit
e)Profit (*C4, p.509 of the sixth edition, C3, p. 517 of the 7th edition)
