Deck 25: Rewarding Business Performance

Question 1

Operating earnings rather than net income is used to compute return on sales.

Answer 1

True

Question 2

The main objective of the balanced scorecard system of performance measurement is achieving the organization's strategic goals.

Answer 2

True

Question 3

Capital turnover can be improved by reducing invested capital while keeping sales constant.

Answer 3

True

Question 4

The balanced scorecard approach attempts to measure whether an organization is meeting its strategic goals.

Question 5

Capital turnover is equal to sales divided by average invested capital.

Question 6

Return on investment (ROI)tells us how much earnings can be expected for the average invested dollar.

Question 7

Capital turnover is calculated by dividing operating income by average invested capital.

Question 8

EVA stands for "evaluating value added" performance.

Question 9

A stock option is a right to sell a certain number of shares at a specific price sometime in the future.

Question 10

The return on investment is calculated by multiplying the capital turnover by the return on sales.

Question 11

Residual income is the difference between net operating income at breakeven and actual net operating income.

Question 12

Residual income is calculated by subtracting the minimum acceptable return on the average invested capital from the operating income.

Question 13

Using only ROI as a business performance measure often leads to the best decisions.

Question 14

The value chain starts with the supplier and ends with the consumer.

Question 15

Most organizations try to achieve their goals by providing incentives to employees who use resources wisely.

Question 16

The value chain consists of only those activities that increase the selling price of a product as it is distributed to a customer.

Question 17

To increase return on sales,a manager could decrease cost of goods sold while increasing revenues.

Question 18

A common criticism of capital ROI as a performance measurement criterion is that it encourages a long-term orientation sometimes to the detriment of shorter-term planning.

Question 19

Return on investment indicates the profitability that can be expected from one dollar of sales.

Question 20

Accounting systems do not offer any benefit to management in generating and focusing employee motivation.

Question 21

Bonuses may be used to reward employees who meet performance goals.

Question 22

Which of the following accounting system characteristics cannot generate motivation?

A)Creating and setting goals.
B)Measuring progress towards those goals.
C)Allocating rewards towards goal achievement.
D)Balancing debits and credits.

Question 23

The return on investment is calculated by:

A)Multiplying the capital turnover by the return on sales.
B)Dividing the capital turnover by the return on sales.
C)Dividing average invested capital by sales.
D)Multiplying operating income by capital turnover.

Question 24

Which of the following is not one of the components of the DuPont system for measuring and evaluating business performance?

A)Return on sales.
B)Return on investment.
C)Inventory turnover.
D)Capital turnover.

Question 25

In considering customer's needs,the balanced scorecard method will look at:

A)Market share growth and customer retention.
B)Return on sales and sales turnover.
C)Residual income and return on investment.
D)Organizational procedures and information systems.

Question 26

Stock based performance evaluation of managers is considered more risky than accounting based performance evaluation.

Question 27

Which of the following measures the amount of sales dollars generated from each dollar of capital invested in assets?

A)Return on sales.
B)Return on investment.
C)Accounts receivable turnover.
D)Capital turnover.

Question 28

Clancy Stores has sales of $1,574,000,cost of sales of $653,000,and operating expenses of $292,000.What is Clancy's return on sales?

A)58.5%.
B)41.5%.
C)60%.
D)40%.

Question 29

The Parry Company provided the following information regarding its operations: 2014 Total assets $500,000
2015 Total assets $550,000
2014 Net operating income $875,000
2015 Net operating income $925,000
2014 Net sales $2,525,000
2015 Net sales $3,100,000
What is Parry's ROI for the year ending 2015? (Round your answer to 2 decimal places.)

A)1.50%.
B)2.72%.
C)1.76%.
D)1.82%.

Question 30

The Lastrom Company provided the following information regarding its operations: 2014 Total assets $750,000
2015 Total assets $800,000
2014 Net operating income $1,875,000
2015 Net operating income $1,925,000
2014 Net sales $4,525,000
2015 Net sales $5,100,000
What is Lastrom's ROI for the year ending 2015?

A)2.48%.
B)2.72%.
C)2.40%.
D)2.50%.

Question 31

Calculate the residual income assuming the following information:

A)$156,000.
B)$108,000.
C)$219,000.
D)$45,000.

Question 32

The set of activities necessary to create and distribute a desirable product or service to a customer is known as:

A)A customer perspective.
B)Business process perspective.
C)Balanced scorecard.
D)Value chain.

Question 33

Which ratio tells managers about how the invested capital is generating sales dollars?

A)Return on investment.
B)Receivable turnover.
C)Capital turnover.
D)Return on sales.

Question 34

Dwyer Company's ROI is 6% and its return on sales is 16%.What is its capital turnover?

A)3%.
B)37.5%.
C)300%.
D)Some other percentage.

Question 35

Which of the following is not one of the strategies of the financial perspective lens of the balanced scorecard?

A)Improve shareholder perspectives.
B)Improve credit rating.
C)Improve customer relations.
D)Reduce risk.

Question 36

A system that considers the earnings per sales dollar and the investment used to generate those sales dollars is called:

A)The economic value added system.
B)The balanced scorecard system.
C)The DuPont system.
D)The residual income system.

Question 37

Residual income can be defined as:

A)Income remaining after dividends are paid out.
B)Operating earnings minus return on investment.
C)Operating earnings plus a minimum acceptable return times average invested capital.
D)Operating earnings minus a minimum acceptable return times average invested capital.

Question 38

Which of the following is not a measure used by the financial perspective lens of the balanced scorecard?

A)ROI.
B)EVA.
C)Residual income.
D)Net operating income.

Question 39

The value chain usually starts with the _________ and ends with the ____________.

A)Supplier; customer
B)Retailer; wholesaler
C)Customer; retailer
D)Retailer; customer

Question 40

Morgan Company has a ROI of 5% and a capital turnover of 8%.What is its return on sales?

A)133%.
B)75%.
C)62.5%.
D)Some other percentage.

Question 41

Listed below are eight accounting terms introduced or emphasized in this chapter: Each of the following statements may (or may not)describe one of these technical terms.In the space provided,indicate the accounting term described,or answer "none" if the statement does not correctly describe any of the terms.
(a)_______ is the amount by which operating earnings exceeds a minimum acceptable return on the average invested capital.The minimum rate of return represents the opportunity cost of using the invested capital.
(b)______ is the operating income divided by the average invested capital associated with the generation of that income.
(c)_______ is computed by dividing the operating income by the total sales for a particular business segment or product line.It tells managers the amount of earnings generated from a dollar of sales.
(d)_______ give an employee the right to purchase a pre-specified number of shares at a pre-specified price within a certain future time period.They provide incentives for managers to increase stock prices.
(e)_______ is the set of activities necessary to create and distribute a desirable product or service to a customer.
(f)_______ is a specific type of residual income.It is computed by multiplying weighted average cost of capital by total assets minus current liabilities,and subtracting that product from the after-tax operating income.
(g)_______ is a measure created by dividing sales by the average invested capital to generate those sales.It tells managers the amount of sales generated by a dollar of invested capital.
(h)_______ is a system for performance measurement that links a company's strategy to specific goals,assesses progress towards those goals,and measures specific initiatives to achieve those goals.It is a systematic attempt to create a business performance measurement process that integrates objectives across four business lenses to achieve the organization's strategic goals.

Question 42

The following information is available for the Hancock Company. Compute the answers for items A-D.

Question 43

Management compensation plans:

A)May be affected by adopting International Financial Reporting Standards since earnings under IFRS are typically higher than GAAP earnings.
B)May be affected by adopting International Financial Reporting Standards since earnings under IFRS are typically lower than GAAP earnings.
C)Will not be affected by IFRS since earnings are equivalent to GAAP.
D)Are decided by shareholders who do not consider GAAP or IFRS when deciding how much compensation managers receive.

Question 44

Explain the importance of incentive systems for motivating performance.

Question 45

Identify the criticisms of using ROI (Return on investment)as the only performance measure.

Question 46

Define the measurement model known as the DuPont system used for evaluating business performance.

Question 47

Which of the following is not one of the balanced scorecard lenses?

A)Financial perspective.
B)Learning and growth perspective.
C)Production perspective.
D)Business process perspective.

Question 48

Identify and explain the components of management compensation and the tradeoffs that compensation designers make.

Question 49

One of the strategies of the business process perspective lens of the balanced scorecard is to improve the quality of the manufacturing process.Which of the following is not one of the measures?

A)Number of on-time deliveries.
B)Machine downtime.
C)Percent of orders filled.
D)Scrap as a percentage of raw materials.

Question 50

Which of the following is not a strategy of the learning and growth lens of a balanced scorecard?

A)Improve employee relations.
B)Improve customer relations.
C)Improve employee productivity.
D)Increase new product development.

Question 51

The following information regarding the Duncan Company is available: Compute the answers for items A-D.

Question 52

How is the balanced scorecard used to identify,evaluate,and reward business performance?

Question 53

Calculate and explain residual income and economic value added.