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finance data bank




Question;1.;Under the notion of controllability, it;is most appropriate for top management to evaluate the profitability of an;investment center in terms of;A.;Profits in relation to the amount of;capital invested in the unit.;B.;Returns expressed as a percentage.;C.;Profits expressed in absolute terms.;D.;Operating profit generated.;E.;Returns expressed in actual dollar;amounts.;2.;Which of the following is the most;appropriate and comprehensive short-term financial-performance indicator for an;investment center that is a division of a larger business entity?;A.;Residual income (RI).;B.;Operating income, pre-tax;C.;Return on equity (ROE).;D.;Operating income, after-tax.;E.;Return on sales (ROS).;3.;The conventional return on investment;(ROI) performance measure calculates "profit" and;investment" based on;A.;American Accounting Association (AAA);recommendations.;B.;Generally Accepted Accounting Principles;(GAAP).;C.;The American Institute of Certified;Public Accountants (AICPA) regulations.;D.;The legal and business professions;practices.;E.;Ordinary and customary practices in;accounting.;4.;Return;on investment (ROI) is the result of multiplying;A.;Return times average investment.;B.;Profit times average operating assets.;C.;Return on sales (ROS) times asset;turnover (AT).;D.;Return on assets (ROA) times asset;turnover (AT).;E.;Margin on sales times return on assets;(ROA).;5.;Determination of the useful life of an;asset and choice of a depreciation method will affect all of the following except;A.;The amount of operating income earned by;an investment center for any given period.;B.;The investment base for purposes of;calculating ROI.;C.;Amount of depreciation expense recorded;for any given period.;D.;Net book value (NBV) of an asset as of;any point in time.;E.;The opportunity cost of lost sales on;alternative projects.;6.;The choice of valuation method for;inventories would normally not affect which item(s) used in calculating;ROI?;A.;The valuation of fixed assets (e.g.;Plant, Property, and Equipment) used by an investment center.;B.;The amount of operating income earned by;an investment center in a given period.;C.;Both the investment base and the level;of operating income reported by an investment center.;D.;The estimated value of current assets of;a business entity, such as an investment center.;E.;The return on sales (ROS) of an;investment center for the period.;7.;As a general rule, leased assets should;be included as part of the calculation of "investment" (for;calculating ROI and residual income) since they represent assets used;A.;As collateral to borrow funds.;B.;To generate operating income.;C.;To offset current operating expenses.;D.;To reduce taxes.;E.;To estimate earnings per share for a;given period.;8.;Firms;with high operating leverage tend to have;A.;High asset turnover and high return on;sales.;B.;Low asset turnover and low return on;sales.;C.;Low asset turnover and high return on;sales.;D.;High asset turnover and low return on;sales.;E.;Decreased levels of short-term fixed;costs.;9.;Which;one of the following is an advantage of both ROI and Residual Income (RI)?;A;They both measure all elements important;for measuring short-term financial performance of.;investment centers: revenues, costs, and investment.;B.;They are both very widely used.;C.They;both can use the minimum rate of return to adjust for differences in risk;across different investment centers.;D.;They are both comparable to interest;rates and to rates of return on alternate investments.;E.They;can both use a different minimum rate of return for different types of assets;used by an investment center.;10. When;investments in facilities are shared by different subunits in a firm;allocation of cost of these common facilities to sharing units should be;determined by;A.;Reference to Generally Accepted;Accounting Principles (GAAP).;B.;Amount of capacity only.;C.The relative amount of use of the facilities, or;demand for the facilities, by the various investment centers in the;organization.;D.;Special techniques prescribed by the;AICPA.;E.;Some measure of current value (e.g.;replacement cost).;11.;The;difference between the historical cost and the net book value (NBV) of a plant;asset is the;A.;Residual value of the asset.;B.;Depreciation expense for the current;period.;C.;An estimate of the remaining useful life;of the asset.;D.;Accumulated depreciation expense of the;asset.;E.;Estimated replacement cost of the asset.;12.;Use of net book value (NBV) in valuing;investment in operating plant assets, in contrast to using current value, will;A.;Have no appreciable effect on ROI.;B.;Have no appreciable effect on plant;asset book value.;C.;Have no appreciable effect on operating;income.;D.;Usually understate ROI.;E.;Usually overstate ROI.;13. The;use of gross book value (GBV) for measuring the level of investment in;depreciable assets (for purposes of calculating return on investment, ROI) is;preferred by those who value the objectivity of;A.;An historical cost number.;B.;The depreciation process.;C.;Price-level adjusted data.;D.;A declining book value.;E.;Current-cost information.;14.;The;use of replacement cost of assets for purposes of calculating ROI has the;advantage(s) of;A.;Historical accuracy.;B.;Being a sound and relevant measure of;the level of investment in a continuing business.;C.;Objectivity.;D.;Consistency with generally accepted;accounting principles (GAAP).;E.;Avoiding the need for developing;estimates of current cost.;15.;A;primary limitation of ROI as a performance-evaluation metric for investment;centers is that ROI;A.;Is a long-term, not short-term;performance indicator.;B.;Excludes the level of investment from;the performance metric.;C.;Understates the level of;investment" for organizations operating in the knowledge-based;economy.;D.;Cannot handle current-value estimates of;assets.;E.;Is not a relative performance indicator.;16. Return;on investment (ROI) encourages business units?such as investment centers? to;invest only in projects that earn;A.;A rate of return greater than borrowing;costs.;B.;An amount greater than the amount of;EVA? currently being generated.;C.;A rate of return greater than the amount;of residual income currently being earned.;D.;A rate of return less than the unit's;current ROI.;E.;A rate of return higher than the unit's;current ROI.;17. Because;residual income (RI) is a dollar amount, in contrast to a percentage (as is;return on investment, ROI), RI;A.Allows;through different discount rates, adjustment for differing levels of risk;across investment centers within an organization.;B.;Cannot be used to evaluate the financial;performance of a given investment center over time.;C.;Is less useful than ROI for;performance-evaluation purposes.;D.;Allows for differing investment amounts;for different investment centers.;E.;Is less useful to stockholders of the;company.;18.;Since;residual income (RI) is not a percentage, it is not useful for;A.;Comparing business units of;significantly different size.;B.;Evaluating the performance of subunits;with high ROIs.;C.;Motivating goal-congruent behavior on;the part of divisional managers.;D.;Evaluating the short-term financial;performance of small divisions.;E.;Evaluating the short-term financial;performance of larger divisions.;19.;In;contrast to residual income (RI), economic value added (EVA?) uses;A.;The firm's cost of capital rather than;its minimum rate of return.;B.;A measure (or estimate) of economic, not;accounting, income.;C.;A required rate of return in estimating;the amount of profit generated.;D.;Values determined by using conventional;accounting policies (i.e., GAAP).;E.;Accounting, not economic, measures of;income and investment.;20. Put;simply, transfer pricing is a management tool for assigning a "price;to internally transferred goods (or services) in order to simulate the;marketplace, thus encouraging mangers to make decisions that are in the best;interest of the;A.;Operating managers.;B.;Producing (i.e., selling) unit within;the firm.;C.;Firm as a whole.;D.;Manager of the buying (i.e., purchasing);unit.;E.;Operating units in the short run, and;the firm in the long-run.;21.;Because;the full-cost method of transfer pricing includes fixed cost, it can;A.;Pass strict accounting requirements for;determining transfer prices.;B.;Pass strict income tax requirements for;determining transfer prices.;C.;Establish consistency across state and;national borders.;D.;Violate OECD agreements.;E.;Cause sub-optimal short-term decision;making.;22. Use;of the market-price method (when such prices exist) satisfies a key objective;of transfer pricing, namely;A.;Objectivity.;B.;Selectivity.;C.;Usability.;D.;Transportability.;E.;Reliability.;23.;A;key standard in international transfer pricing is;A.;Consistency.;B.;Reliability.;C.;The arm's-length standard.;D.;Open marketability.;E.;Translatability.;24.;The;biggest problem with cost-based transfer prices is;A.;The fact that their use may result in;sub-optimal decisions from the standpoint of the organization as a whole.;B.;Too much negotiation is involved in;determining the transfer price.;C.;Data unavailability.;D.;They are difficult to put into place.;E.;They may lead to goal congruence within;the firm.;25. If;after-tax income of Grey Division, adjusted for economic value, is 15% of;sales, capital employed is $5,000,000 (adjusted for equity-equivalents), the;divisional cost of capital (discount rate) is 8%, and sales are $12,000,000;then EVA? is;A.;$1,800,000;B.;$400,000;C.;$1,400,000;D.;$3,200,000;Undeterminable;given the information above.


Paper#51032 | Written in 18-Jul-2015

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