Deck 13: Financial Performance Measures and Incentive Schemes

Question 1

Precious Metals Pty Ltd earned residual income of $70 000 during the year.The net profit was $250 000 during the year and the required return was 15 per cent.What was the invested capital?

A) $1 200 000
B) $1 500 000
C) $1 400 000
D) $1 300 000

Answer 1

A

Question 2

Net book value produces a misleading increase in return on investment because:

A) investment centres with old assets will show a higher return on investment than centres with new assets
B) investment centres with old assets will show a lower return on investment than investment centres with new assets
C) investment centres with old assets will show an equal return on investment centres with new assets
D) book value reflects changing market values

Answer 2

A

Question 3

The following information pertains to Bingo Concrete for the year 2008:
Sales are $1 500 000
Gross margin is $600 000
Profit is $90 000
What is the profit margin for the year?

A) 40%
B) 30%
C) 20%
D) 6%

Answer 3

D

Question 4

Holt Company Ltd determined residual income for the year of $22 000.The company's cost of capital was 12 per cent,the investment turnover was 2.0,and capital invested was $400 000.What was Holt Company's profit during the year?

A) $26 000
B) $48 000
C) $74 000
D) $70 000

Question 5

One of the advantages of using net book value to measure invested capital is that:

A) it maintains consistency with the balance sheet prepared for external reporting purposes
B) it allows comparison of return on investment with different companies
C) the return on investment will increase steadily over time
D) it maintains consistency with the balance sheet prepared for external reporting purposes AND it allows comparison of return on investment with different companies

Question 6

Which of the following gives a more accurate calculation of return on investment and residual income?

A) Total capital invested
B) Total assets
C) Average invested capital
D) Average cost of capital

Question 7

The return on investment can be defined as:

A) capital invested divided by total sales
B) total sales divided by capital invested
C) profit divided by capital invested
D) profit divided by total sales

Question 8

Which of the following statements is false?

A) Tying rewards to a profit-based measure can provide an incentive for managers to manipulate accounting results.
B) Reward systems can be used at all levels of the organisation.
C) Reward systems focus on long-term results.
D) A reward system can include both cash and non-cash rewards.

Question 9

Joy Home Fashions reported a return on investment during the year of 6 per cent and a profit margin of 12 per cent.What was the investment turnover for the year?

A) 18%
B) 50%
C) 72%
D) 20%

Question 10

Calculate the asset turnover from the following data:

A) 0.07
B) 0.67
C) 0.53
D) 0.05

Question 11

The asset turnover of an organisation can be calculated as:

A) the amount of sales revenue divided by total invested capital
B) total invested capital divided by sales revenue
C) total sales revenue divided by profit
D) profit divided by sales margin

Question 12

The advantage of residual income as a measure of investment centre performance is:

A) it can be used to compare investment centres of different sizes
B) it focuses on long-term performance
C) it includes the organisation's minimum required rate of return
D) it can be used to compare investment centres of different sizes AND it includes the organisation's minimum required rate of return

Question 13

Calculate the return on investment of new equipment in the first year if:
Profit = $3 000 000
Invested capital = $45 000 000
Increase in divisional profits = $45 000
Purchase of new machine = $900 000

A) 5%
B) 6.66%
C) 1.5%
D) None of the given answers

Question 14

Fine Furnishings Pty Ltd earned residual income of $40 000 during the year.The net profit was $160 000 during the year and the cost of capital was 12 per cent.What was the return on investment for the year?

A) 9%
B) 12%
C) 16%
D) Insufficient information to determine

Question 15

Carlton division has been stagnant for the past five years,neither growing nor contracting in size and profitability.Investments in new property,plant and equipment have been minimal.Would the division's use of total assets (valued at net book value)when measuring return on investment result in (1)using numbers that are consistent with those in the balance sheet and (2)a rising return on investment over time?
A.
Yes
Yes
B.
No
Yes
C.
No
No
D.
Yes
Need more information to judge

Question 16

For Echuca Ltd sales are $1 500 000,profit is $90 000,invested capital is $450 000 and the interest rate is 8 per cent.What is the residual income for the year?

A) ($30 000)
B) $54 000
C) $82 800
D) $36 000

Question 17

Managers' performance in an investment centre can best be evaluated by:

A) the total revenue under their control
B) the total capital invested in the organisation and the sizeable amount of return
C) the profit earned during a period less all revenues
D) those revenues,costs and investments that they can control

Question 18

For Mildura Ltd,if the sales are $1 500 000,the invested capital $450 000 and the profit $90 000,what is the asset turnover for the year?

A) 20%
B) 5%
C) 30%
D) 333%

Question 19

Bricker Fabrics reported a profit margin during the year of 20 per cent and an investment turnover of 40 per cent.What was its return on investment for the year?

A) 50%
B) 20%
C) 8%
D) 2%

Question 20

One of the disadvantages of return on investment is that:

A) it focuses on profit only and disregards the cost of the assets
B) it may discourage managers from investing in profitable projects
C) it does not enable comparison of investment centres of different sizes
D) it focuses only on long-term performance

Question 21

Shareholder value added may be defined as:

A) corporate value - market value of the company
B) corporate value - market value of debt
C) corporate value - present value of liabilities
D) corporate value - current liabilities

Question 22

Which of the following are value drivers (i.e.create value for the business)?
I)Growth
Ii)Sustainability
Iii)Spread
Iv)Cost of capital

A) i,ii and iii
B) ii,iii and iv
C) i,iii and iv
D) All of the given answers

Question 23

Which of the following measures of performance is based,in part,on weighted average cost of capital?

A) Return on investment
B) Capital turnover
C) Return on sales
D) Economic value added

Question 24

All the following actions will increase return on investment except:

A) an increase in sales revenues
B) a decrease in operating expenses
C) a decrease in the company's invested capital
D) a decrease in the number of units sold

Question 25

The northern division of Aussie Estates has reported a profit of $4 million.Divisional invested capital is $2.5 million and the imputed interest rate is 12 per cent.What is the residual income?

A) $180 000
B) $1.78 million
C) $2.15 million
D) $3 700 000

Question 26

Extan division of World Corporation reported a residual income of $200 000.The division had $8 million of invested capital and a profit of $1 million.What is the imputed interest rate?

A) 7.5%
B) 10.0%
C) 12.5%
D) 20%

Question 27

Speedy Ltd has an imputed interest rate of 12 per cent.Division Z of Speedy Ltd has invested capital of $800 000 and a return on investment of 15 per cent.What is the residual income?

A) ($24 000)
B) $24 000
C) $96 000
D) None of the given answers

Question 28

Which of the following strategies may increase economic value added?

A) Increase profit as a percentage of capital employed.
B) Borrow additional funds and invest in assets that earn more than the weighted average cost of capital.
C) Sell off assets that earn more than the weighted average cost of capital.
D) Increase profit as a percentage of capital employed AND borrow additional funds and invest in assets that earn more than the weighted average cost of capital.

Question 29

Which of the following is/are,according to Herzberg,hygiene factors?

A) Recognition
B) Working conditions
C) Relationships with colleagues
D) Working conditions AND relationships with colleagues

Question 30

Which of the following are,according to Herzberg,motivating factors?

A) Recognition
B) Working conditions
C) Relationships with colleagues
D) Recognition AND working conditions

Question 31

Given that return on investment measures performance over time,the invested capital would most appropriately be calculated by using:

A) beginning of year assets
B) average assets
C) total assets
D) current assets

Question 32

Tentafield Ltd has an after tax operating income of $2.6 million,assets totalling $8 million and current liabilities totalling $400 000.The weighted average cost of capital is 10 per cent.What is the economic value added?

A) $1 400 000
B) $1 800 000
C) $1 840 000
D) None of the given answers

Question 33

The following information relates to Black's Mount Ltd:
What is its economic value added?

A) $120 000
B) $180 000
C) $240 000
D) $292 000

Question 34

Which of the following statements is/are correct?

A) Invested capital is the assets that an investment centre has available to generate profit.
B) When evaluating an investment centre,only the profit is important.
C) Return on investment focuses on how effectively each investment centre has used its investment capital.
D) Invested capital is the assets that an investment centre has available to generate profit AND return on investment focuses on how effectively each investment centre has used its investment capital.

Question 35

Which of the following statements is false?

A) Group reward schemes help people identify with the group.
B) Group reward schemes discriminate between good and bad performers.
C) Group reward schemes avoid excessive competition between employees.
D) Group reward schemes may encourage 'freeloaders'.

Question 36

Which of the following is an example of an intrinsic reward?

A) Cash bonus
B) Personal satisfaction
C) Larger office
D) Certificate of merit

Question 37

The profitability of an investment centre can best be evaluated by:

A) the revenues,costs and investment the manager can control
B) the total capital invested in the organisation and the sizeable amount of return
C) the profit margin and the investment capital traceable to the investment centre
D) the divisional contribution margin

Question 38

Which of the following is the correct mathematical expression for return on investment?

A) Sales margin ÷ capital turnover
B) Sales margin - capital turnover
C) Sales margin × capital turnover
D) Capital turnover ÷ sales margin

Question 39

Return on investment may be improved by increasing:

A) cost of goods sold and expenses
B) sales margin and cost of capital
C) sales revenue and cost of capital
D) capital turnover or sales margin

Question 40

White Hills Ltd reported a return on investment of 12 per cent,a capital turnover of 5 and income of $180 000.What was the company's invested capital?

A) $300 000
B) $900 000
C) $1 500 000
D) $7 500 000

Question 41

The income calculation for a divisional manager's return on investment should be based on:

A) divisional contribution margin
B) profit margin controllable by the divisional manager
C) profit margin traceable to the division
D) division income before interest and income tax

Question 42

Which of the following items do not form part of the economic value added calculation?

A) Weighted average cost of capital
B) Book value of equity
C) Market value of equity
D) Income tax rate

Question 43

Which of the following is/are an extrinsic reward?

A) Share options
B) Job satisfaction
C) Promotion
D) Share options AND promotion

Question 44

Which of the following may be implemented as targets for a group or company-wide performance reward scheme?
I)Employee absenteeism
Ii)Lost-time accident
Iii)Customer satisfaction

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 45

For which of the following reasons are group reward systems often preferred to individual schemes?
I)They encourage teamwork
Ii)They reduce dysfunctional competition between employees.
Iii)They promote equity between employees.

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 46

Carlton division has been stagnant for the past five years,neither growing nor contracting in size and profitability.Investments in new property,plant and equipment have been minimal.Would the division's use of total assets (valued at net book value)when measuring return on investment result in (1)using numbers that are consistent with those in the balance sheet and (2)a rising return on investment over time?
Consistent with numbers on the balance sheet
Produce a rising return on investment over time

A) Yes
Yes
B) No
Yes
C) No
No
D) Yes
Need more information to judge

Question 47

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the return on investment for the period.

A) 11%
B) 10%
C) 4%
D) Always the same as the imputed interest rate

Question 48

Individual reward schemes have which of the following advantages?
I)They relate to individual effort
Ii)They reward only good performers.
Iii)They discourage dysfunctional competition between individuals.

A) i and ii
B) i and iii
C) ii and iii
D) None of the given answers

Question 49

Which of the following statements is/are false?
I)Return on investment encourages managers to take a long-term view of corporate performance
Ii)Return on investment may encourage managers to defer the replacement of worn assets.
Iii)Return on investment may encourage managers to increase expenditure on research and development.

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 50

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the amount of residual income for the period.

A) $70 000
B) $7000
C) $77 000
D) $680 000

Question 51

Sunrise Dairies has a return on investment of 15 per cent.A Sunrise division,which currently has a return on investment of 13 per cent and $750 000 of residual income,is contemplating a large investment that will (1)reduce divisional return on investment and (2)produce residual income of $120 000.If Sunrise strives for goal congruence,the investment:

A) should not be approved because it reduces divisional return on investment.
B) should not be approved because the division's return on investment is less than the corporate return on investment before the investment is considered.
C) should be approved because it produces $120 000 residual income for the division.
D) should be approved because,after acquisition,the division's return on investment and residual income are both positive numbers.

Question 52

Which of the following are included in performance-related reward systems?
I)Share options
Ii)Profit sharing
Iii)Team-based bonuses

A) i and ii
B) i and iii
C) ii and iii
D) All of the given answers

Question 53

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the investment turnover (rounded)for the period.

A) 0.37 times
B) 11 times
C) 0.11 times
D) 2.7 times

Question 54

The Fitzroy division of Brisbane Enterprises has negative residual income of $540 000.Fitzroy's management is considering an investment opportunity that will reduce this negative amount to $400 000.The investment:

A) should be pursued because it is attractive from divisional and corporate perspectives
B) should be pursued because it is attractive from a divisional perspective although not from a corporate perspective
C) should be pursued because it is attractive from a corporate perspective,although not from a divisional perspective
D) should not be pursued because it is unattractive from a divisional perspective although it is attractive from a corporate perspective

Question 55

Which of the following statements is/are correct when describing expectancy theory?
I)The preference that an employee has for a particular reward is called valence
Ii)Expectancy is the likelihood of achieving the performance necessary to earn the reward.
Iii)An individual's perception that the effort put into a task will lead to a specific reward outcome is fundamental to expectancy theory.

A) i and ii
B) ii and iii
C) i and iii
D) All of the given answers

Question 56

Which of the following is/are an intrinsic reward?

A) Share options
B) Job satisfaction
C) Promotion
D) Share options AND job satisfaction

Question 57

Which of the following items will be most relevant in determining the imputed interest rate for the purposes of calculating residual income?

A) Final net profit
B) Return on investment
C) Investment turnover
D) Riskiness of investments undertaken

Question 58

Richard's Division of Richard and Sons has the following data related to a particular period:
Calculate the return on sales for the period.

A) 4%
B) 11%
C) 40%
D) 0.4%

Question 59

Which of the following is used in the calculation of both return on investment and residual income?

A) Total shareholders' equity
B) Retained earnings
C) Invested capital
D) Cost of capital

Question 60

A division of a firm has a net profit of $640 000 before imputed interest and a residual income of $240 000.If a rate of 10 per cent is used to compute imputed interest,calculate the division's return on investment (rounded to a whole number).

A) 4%
B) 10%
C) 16%
D) 35%

Question 61

Gainsharing is one system companies can use to distribute cash bonuses to employees when the performance of their segment outperforms the set target.

Question 62

A group-based reward system is appropriate when:
I team work is important,and employees need to work together to achieve organisational goals
Ii)it is easy to see individual's effort and performance
Iii it is important to discriminate between good performers and bad performers

A) i
B) i and ii
C) i and iii
D) ii and iii

Question 63

Companies using value-based management operate within a framework of making key decisions that add economic value to the business.

Question 64

The formula for economic value added and the residual income are interchangeable.

Question 65

One of the main advantages of return on investment is that it can be used with some responsibility centres to evaluate performance.

Question 66

Motivation of staff is a key factor in a company achieving their goals and ensuring goal congruence.

Question 67

Return on equity and investment turnover are the components of the expanded return on investment [ROI] formula that enables management to identify ways of improving the ROI.

Question 68

The following information is available for Jittie Ltd:
The WACC for Jittie Ltd is:

A) 7.6%
B) 9.25%
C) 10.9%
D) 9.5%

Question 69

The return on investment of a division will increase if the division is able to:

A) increase return on sales and increase investment turnover
B) increase return on sales or increase investment turnover
C) increase sales revenue and decrease asset turnover
D) increase return on sales and/or increase investment turnover

Question 70

Jasmine Dimm is a call centre manager for Tostra,a mobile phone company.Call centre operators at her call centre are responsible for answering calls from Tostra customers.Some calls are very short,relating to simple enquiries.However,a majority of calls tend to be longer,coming from irate customers complaining about Tostra's services.For these calls,customers are often very emotional and sometimes even abusive.Call operators have no control over what types of calls they get.Jasmine has developed a new reward system for her call centre staff.Under the new system,call centre operators are rewarded if they achieve two performance targets: (1)the duration of 90 per cent of the calls is less than 4 minutes and (2)80 per cent of customers rate Tostra's 'customer service quality' as 'excellent'.Achieving these two monthly performance targets will result in a bonus worth 20 per cent of the call operator's monthly salary.Based on expectancy theory,the major limitation(s)of Jasmine's reward system is:

A) The reward system lacks valence and instrumentality
B) The reward system lacks expectancy
C) The reward system lacks instrumentality
D) The reward system lacks expectancy and instrumentality

Question 71

Designing reward systems is an easy process and is a definite way of ensuring goal-congruence.

Question 72

Jasmine Dimm is a call centre manager for Tostra,a mobile phone company.Call centre operators at her call centre are responsible for making sales calls to customers to promote Tostra's new products.Jasmine sets two performance targets for her operators: sales and average call duration.Every 6 months,any call centre operator who can achieve both targets go into a random draw with a one-in-ten chance to win a $50 supermarket giftcard.All her call centre operators agree that these two targets are clearly specified,objectively measured and achievable with hard work.However,all the call centre operators are still unhappy with the new reward system.According to the expectancy theory,this is because:

A) The reward system lacks valence and instrumentality
B) The reward system lacks expectancy
C) The reward system lacks expectancy and valence
D) The reward system lacks expectancy and instrumentality

Question 73

Expectancy theory relates employee motivation to valence,expectancy and instrumentality.

Question 74

When using residual income,some companies prefer to use the weighted average cost of capital as a basis for determining the imputed interest charge.

Question 75

Value-based management refers to:

A) A framework for applying EVA to all business decisions
B) A framework for making key business decisions that add economic value to the business
C) A philosophy that management should focus on creating customer value
D) A valuation technique that uses discounted cash flows to estimate imputed cost of capital

Question 76

Which of the following statements about developing reward system is incorrect?

A) The key benefit of a profit sharing plan is to encourage employees to think like owners
B) The key benefit of gain sharing plan is to introduce equity,ensuring the employees who contribute to the business can get a share of the gains
C) The key benefit of an employee share plan is to reduce free-riding problems.
D) The key benefit of an individual-based incentive system is to highlight improve expectancy and instrumentality

Question 77

Invested capital can be defined as net assets,total assets,productive assets or working capital.

Question 78

The following information is available for Nettie Ltd:
The company tax rate is 30 per cent.WACC is:

A) 11.2%
B) 10%
C) 7.8%
D) 9.5%

Question 79

Which of the following is a key difference between EVA and residual income?

A) The weighted average cost of capital is used to calculate EVA,but not necessarily for residual income
B) Net profit is used to calculate residual income but is irrelevant for EVA
C) EVA has a long term focus,but residual income has a short term focus
D) There is no difference between EVA and residual income

Question 80

Which of the following information is required to compute SVA (shareholder value added)?
I)PV of cash flows from operations for a certain time period
Ii Residual value of the business
Iii EVA

A) i and ii
B) i and iii
C) i,ii and iii
D) i