Accounting 213 Final
T/F: Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well
False
T/F: Fixed costs are irrelevant in decisions about whether a product should be dropped.
False
T/F: In a special order situation that involves using capacity that is not idle, opportunity costs are zero.
False
T/F: Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision.
False
T/F: Sunk costs are costs that have proven to be unproductive.
False
T/F: Variable costs are always relevant costs in decisions
False
T/F: projects with shorter payback periods are always more profitable than projects with longer payback periods
False
Profitability Index
Net Present Value / Investment Required
The capital budgeting method that recognizes the time value of money by discounting cash flows over the life of the project, using the company's required rate of return as the discount rate is called
Net present value method
What is a grace period for a credit card?
The grace period is the time during which you are allowed to pay your credit card bill without having to pay interest
Payback Period
The length of time that it takes for a project to fully recover its initial cost out of the net cash inflows that it generates.
Rule of 72
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest; 72/i=years to double
The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:
Zero ( If there is no alternative use for the capacity, then there is no opportunity cost associated with using it )
avoidable cost
a cost that can be eliminated by choosing one alternative over another
sunk cost
a cost that has already been committed and cannot be recovered
differential cost
a difference in cost between two alternatives
What is the APR on a credit card?
annual percentage rate
time value of money
the principle that a dollar received today is worth more than a dollar received in the future
Capital Budgeting
the process of planning and managing a firm's long-term investments
What are the two types of bankruptcy? How long does each one stay on your credit report?
two most common types of bankruptcies for individuals: Chapter 7 and Chapter 13; chapter 7 is for 10 years and chapter 13 for 7 years
spending leak
unable to identify what you spent that money on
Payback Period Formula
investment required/net annual cash inflow
If NPV > 0
IRR is greater than discount rate
Tools that consider the time value of money
- Net present value (NPV) - Profitability index - Internal rate of return (IRR)
What are the primary reasons to buy insurance?
1. Buy Safety and Protection in Advance and Be Smart 2. Secure Future Goals 3. Peace of Mind 4. Encourage Savings 5. Manage Risks
How many credit reporting agencies are there?
3; The three major consumer credit bureaus: Equifax, Experian and TransUnion
how long to keep tax records
7 years
consumer debt
Debts that are owed as a result of purchasing goods that are consumable
What are the common types of insurance?
property, auto, health, and life insurance.
Why is the profitability index useful?
shows whether the project is profitable and is a good decision
Internal Rate of Return
the discount rate that makes the NPV of an investment zero
