Question 1

A key standard in international transfer pricing is:

Accepted Answer

The arm's-length standard is a key standard in international transfer pricing. It requires that transactions between related parties be conducted as if they were unrelated parties dealing at arm's length, meaning that the terms of the transaction should be similar to those that would be negotiated between unrelated parties in a similar transaction. This standard helps ensure that profits and losses are properly allocated between related parties and that taxes are appropriately assessed.

Question 2

The historical cost of an asset less its accumulated depreciation is:

Accepted Answer

Net book value (NBV) represents the value of an asset on a company's balance sheet, calculated as the historical cost of the asset less its accumulated depreciation. It is not a measure of return on equity or return on investment, nor does it necessarily represent the current replacement cost or liquidation value of the asset.

Question 3

All of the following are listed as possible transfer pricing methods except:

Accepted Answer

Fixed cost is not a commonly used transfer pricing method. The other options listed (market price, variable cost, full cost, and negotiated price) are all possible transfer pricing methods.

Question 4

The biggest problem with cost-based transfer prices is:

Accepted Answer

Cost-based transfer prices only consider the costs incurred by one department or division and do not take into account the overall goals and profitability of the organization. This may lead to sub-optimal decisions and inefficiencies in resource allocation.

Question 5

A measure of the manager's ability to control expenses and increase revenues in order to improve profitability is:

Accepted Answer

Return on sales (ROS) measures the percentage of sales revenue that is retained after all expenses have been paid. It shows how much profit the company makes for every dollar of sales. By controlling expenses and increasing revenues, a manager can improve ROS and ultimately improve profitability.

Question 6

A measure of the manager's ability to produce increased sales from a given level of investment is:

Accepted Answer

The answer of A measure of the manager's ability to...

Question 7

The estimated price that could be received for the sale of divisional assets is referred to as:

Accepted Answer

The estimated price that could be received for the sale of divisional assets is referred to as the liquidation value. This value represents the amount of cash that would be received if the assets were sold off individually in a forced sale situation. It is typically lower than the gross book value, as it takes into account the fact that the assets may need to be sold quickly and potentially at a discount.

Question 8

Which one of the following transfer pricing alternatives is based on determining an appropriate markup,where the markup is based on gross profits of unrelated firms selling similar products?

Accepted Answer

The resale-price method involves determining an appropriate resale price of a product, based on the price at which the product is sold by the subsidiary to unrelated customers. From this resale price, an appropriate markup or profit margin is then determined, which is based on the gross profits of unrelated firms selling similar products. This method ensures that the profits earned by the subsidiary are consistent with the profits earned by unrelated companies selling similar products, and it allows for a fair allocation of profits and costs between the parent company and the subsidiary.

Question 9

ROI,though widely used,is subject to which one of the following limitations?

Accepted Answer

ROI may motivate managers to focus on projects that improve their division's ROI without considering whether these projects are in the best interest of the organization as a whole, potentially leading to suboptimal decisions for the company.

Question 10

Which one of the following is not a limitation shared by residual income (RI)and return on investment (ROI)?

Accepted Answer

Residual income (RI) does not relate earnings to the level of investment, as it focuses on the absolute amount of income over a required return, unlike ROI which is a ratio of earnings to investment.

Question 11

Because the full-cost method of transfer pricing includes fixed cost,it can:

Accepted Answer

Including fixed costs in transfer pricing can lead to sub-optimal short-term decision making because it may not reflect the actual incremental costs of production, potentially leading to decisions that do not maximize overall company profitability.

Question 12

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 $12,000,000,then EVA$\rarr$is:

Accepted Answer

EVAF1F1F1S1F1F1F10 = (After-tax Income - Capital Charge)
After-tax Income = 15% * $12,000,000 = $1,800,000
Capital Charge = 8% * $5,000,000 = $400,000
EVAF1F1F1S1F1F1F10 = $1,800,000 - $400,000 = $1,400,000. 
Therefore, the correct choice is C.

Question 13

Which one of the following establishes an arm's length price by using the sales prices of similar products made by unrelated firms?

Accepted Answer

The comparable-price method establishes an arm's length price by using the sales prices of similar products made by unrelated firms. This method is commonly used in transfer pricing to ensure that transactions between related parties are conducted at fair market value. The wholesale-price method and retail-price method do not rely on sales prices of similar products made by unrelated firms, and the related-products method and cost-plus method do not establish an arm's length price based on comparable prices determined from unrelated firms.

Question 14

Use of the market-price method satisfies a key objective of transfer pricing,namely:

Accepted Answer

The market-price method is based on actual market prices for similar goods or services, making it an objective measure of transfer pricing. The method relies on external data, which provides a reliable and transparent basis for deciding transfer prices. Therefore, by using the market-price method, the objective of transfer pricing is met.

Question 15

A business unit's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

Accepted Answer

Economic value added (EVA) is a measure of a company's financial performance that calculates the value created beyond the required return of the company's shareholders, factoring in the cost of capital.

Question 16

Replacement cost of a division's assets will most probably be greater than:

Accepted Answer

The answer of Replacement cost of a division's assets will...

Question 17

The estimated cost to replace assets at the current level of service and functionality is defined as:

Accepted Answer

Replacement cost is the estimated cost to replace assets at the current level of service and functionality. It takes into account the current market value of assets and reflects the cost of purchasing or constructing new assets of the same type and capacity. Gross book value (A) refers to the total original cost of an asset. Historical cost (B) is the original cost of an asset, and accumulated depreciation is subtracted from that amount to determine book value. Liquidation value (C) is the estimated amount of money that could be obtained from selling assets in an emergency situation, which is typically less than replacement cost. Price-level adjusted original cost (E) adjusts historical cost for inflation, but does not reflect the current market value of assets.

Question 18

Which one of the following determines the transfer price based on the seller's costs,plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

Accepted Answer

Cost-plus method determines the transfer price based on the seller's costs, plus a gross profit percentage.

Question 19

A dollar amount equal to the operating income of a business unit less a charge for the level of investment in the unit is called:

Accepted Answer

Residual income (RI) is a dollar amount that subtracts a charge for the level of investment in the unit from the operating income of that unit. It is also known as economic profit or economic value added (EVA). RI is used as a performance measure to determine how well a business unit is using its resources to generate profits above its required return.

Question 20

Consider the following data for three divisions of a company,X,Y,and Z: 
The return on investment (ROI)for Division X is:

Accepted Answer

The answer of Consider the following data for three divisions...

Quiz 19: Strategic Performance Measurement: Investment Centers

A key standard in international transfer pricing is:

The historical cost of an asset less its accumulated depreciation is:

All of the following are listed as possible transfer pricing methods except:

The biggest problem with cost-based transfer prices is:

A measure of the manager's ability to control expenses and increase revenues in order to improve profitability is:

A measure of the manager's ability to produce increased sales from a given level of investment is:

The estimated price that could be received for the sale of divisional assets is referred to as:

Which one of the following transfer pricing alternatives is based on determining an appropriate markup,where the markup is based on gross profits of unrelated firms selling similar products?

ROI,though widely used,is subject to which one of the following limitations?

Which one of the following is not a limitation shared by residual income (RI) and return on investment (ROI) ?

Because the full-cost method of transfer pricing includes fixed cost,it can:

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 $\rarr$ is:

Which one of the following establishes an arm's length price by using the sales prices of similar products made by unrelated firms?

Use of the market-price method satisfies a key objective of transfer pricing,namely:

A business unit's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

Replacement cost of a division's assets will most probably be greater than:

The estimated cost to replace assets at the current level of service and functionality is defined as:

Which one of the following determines the transfer price based on the seller's costs,plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

A dollar amount equal to the operating income of a business unit less a charge for the level of investment in the unit is called:

Consider the following data for three divisions of a company,X,Y,and Z: The return on investment (ROI) for Division X is:

Quiz 19: Strategic Performance Measurement: Investment Centers

A key standard in international transfer pricing is:

The historical cost of an asset less its accumulated depreciation is:

All of the following are listed as possible transfer pricing methods except:

The biggest problem with cost-based transfer prices is:

A measure of the manager's ability to control expenses and increase revenues in order to improve profitability is:

A measure of the manager's ability to produce increased sales from a given level of investment is:

The estimated price that could be received for the sale of divisional assets is referred to as:

Which one of the following transfer pricing alternatives is based on determining an appropriate markup,where the markup is based on gross profits of unrelated firms selling similar products?

ROI,though widely used,is subject to which one of the following limitations?

Which one of the following is not a limitation shared by residual income (RI) and return on investment (ROI) ?

Because the full-cost method of transfer pricing includes fixed cost,it can:

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 →\rarr→ is:

Which one of the following establishes an arm's length price by using the sales prices of similar products made by unrelated firms?

Use of the market-price method satisfies a key objective of transfer pricing,namely:

A business unit's after-tax cash operating income less depreciation and less an imputed cost of capital is called its:

Replacement cost of a division's assets will most probably be greater than:

The estimated cost to replace assets at the current level of service and functionality is defined as:

Which one of the following determines the transfer price based on the seller's costs,plus a gross profit percentage determined from comparison of sales of the seller to those of unrelated parties?

A dollar amount equal to the operating income of a business unit less a charge for the level of investment in the unit is called:

Consider the following data for three divisions of a company,X,Y,and Z: The return on investment (ROI) for Division X is:

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 $\rarr$ is: