Question 1

Which of the following statements most accurately describes residual income?

Accepted Answer

Residual income is the income generated by a division or department above the minimum level required to generate an acceptable return on the assets used. It is the amount of income remaining after deducting a company's total cost of capital from its net operating income.

Question 2

The ROI (Return on Investment)formula focuses on the amount of operating income earned before other revenue/expense items, such as interest expense, by utilizing the average total assets employed for the year.

Accepted Answer

The ROI formula takes operating income divided by average total assets to calculate the return on investment. It does not include other revenue or expense items such as interest expense in the calculation.

Question 3

Which of the following is the correct formula for profit margin ratio?

Accepted Answer

The answer of Which of the following is the correct...

Question 4

Huntswell Corporation has two major divisions: Agricultural Products and Industrial Products. It provides the following information for the year 2014  Calculate the residual income for the Agriculture division.

Accepted Answer

Residual income for Agriculture division = Operating income - (Total assets x Minimum required rate of return)
Operating income for Agriculture division = $23,000
Total assets for Agriculture division = $140,000
Minimum required rate of return = 12%
Residual income for Agriculture division = $23,000 - ($140,000 x 12%) = $4,400
Therefore, the correct answer is B) $4,400.

Question 5

RI (Residual Income)considers both the division's operating income and its average total assets. In addition, it also incorporates another piece of information known as top management's target rate of return.

Accepted Answer

Residual Income considers operating income, average total assets, and top management's target rate of return.

Question 6

RI (Residual Income)compares the division's actual operating income with the minimum operating income expected given the size of the division's average total assets.

Accepted Answer

This is a correct definition of Residual Income (RI). It measures the division's efficiency in generating income over and above the cost of the capital that has been invested in its assets.

Question 7

Which of the following is the correct formula for calculating return on investment?

Accepted Answer

Return on investment (ROI) is calculated as operating profit divided by average total assets. This provides a measure of how efficiently a company is using its assets to generate profits. Options A, B, and D are all related to profitability, but do not take into account the assets used to generate that profit.

Question 8

Recreation Equipment Company has several divisions which are investment centers. Data for the Boat Division and the Trailer Division are shown here:  Which of the following statements would be the most meaningful interpretation of this data?

Accepted Answer

The answer of Recreation Equipment Company has several divisions which...

Question 9

To evaluate the performance of an investment center, a business needs key performance indicators that measure:

Accepted Answer

Key performance indicators that measure operating income and efficient use of assets are important for evaluating the performance of an investment center. This indicates how well the center is generating profits and utilizing its resources to create value. Manufacturing efficiency and product defect rate, customer satisfaction and market share, generation of sales revenues, and control of operating expenses are also important, but not as relevant to evaluating the performance of an investment center specifically.

Question 10

Which of the following is the correct formula for calculating residual income?

Accepted Answer

Residual income is calculated as operating income minus the minimum acceptable operating income, which is often determined by multiplying the required rate of return by the average operating assets.

Question 11

The target rate of return is the maximum rate of return that top management expects a division to earn with its average total assets.

Accepted Answer

The target rate of return is the minimum rate of return that top management expects a division to earn with its average total assets, not the maximum.

Question 12

Which of the following is an expanded form of calculating return on investment?

Accepted Answer

Return on investment can be expanded as Profit margin ratio multiplied by Asset turnover ratio. Profit margin ratio measures the net income earned by the business for every dollar of revenue generated, whereas asset turnover ratio measures the efficiency with which a company is using its assets to generate sales. Together, they give a clearer picture of how effectively a company is using its resources to make a profit.

Question 13

Which of the following is the correct formula for asset turnover ratio?

Accepted Answer

Asset turnover ratio measures how efficiently a company is using its assets to generate revenue. The formula for asset turnover ratio is net sales divided by average total assets.

Question 14

In many cases, the amount of the transfer price does not affect the overall company profits.

Accepted Answer

Transfer pricing is an internal accounting practice where divisions of a company transact with each other. The overall company profits remain unchanged as the transfer price is an internal allocation of costs and revenues.

Question 15

Huntswell Corporation has two major divisions: Agricultural Products and Industrial Products. It provides the following information for the year 2014.  Calculate the profit margin ratio for the Industrial Division of the company.

Accepted Answer

The answer of Huntswell Corporation has two major divisions: Agricultural...

Question 16

Recreation Equipment Company has several divisions that are investment centers. Data for the Boat Division and the Trailer Division are shown here:  With regard to the efficient use of assets, the Boat Division has a higher ROI (Return on Investment)because it has the highest operating income.

Accepted Answer

The answer of Recreation Equipment Company has several divisions that...

Question 17

The primary objective in setting transfer prices is to achieve goal congruence by selecting a price that will maximize overall company profits.

Accepted Answer

The primary objective of setting transfer prices is to achieve goal congruence, meaning that the interests and objectives of different departments or divisions within a company are aligned. This is done by selecting a price that will maximize overall company profits, rather than just the profits of one particular department or division. Therefore, the statement is true.

Question 18

Parkinson Company provides the following financial information:  Calculate return on investment based on the information given above.

Accepted Answer

Return on investment can be calculated as operating income divided by average operating assets. Using the information given in the table, we can calculate the average operating assets as (Beginning Operating Assets + Ending Operating Assets) / 2 = ($426,000 + $438,000) / 2 = $432,000. Operating income is given as $28,080. Therefore, return on investment is calculated as $28,080 / $432,000 = 6.5%. The closest answer choice is C with 6.9%.

Question 19

A company may prefer to use residual income over return on investment for performance evaluation because:

Accepted Answer

Residual income is calculated by deducting a minimum required rate of return from the net operating income. This means that managers are only rewarded for investments that generate more than the minimum required rate of return. Therefore, residual income is more likely to lead to goal congruence as it motivates managers to make investments that are profitable for the company as a whole. Return on investment, on the other hand, is an absolute figure that does not take into account the cost of capital or the minimum required rate of return. This means that managers could invest in projects with low returns as long as they generate a positive return on investment, which may not be beneficial for the company.

Question 20

The transfer price is the transaction amount of one unit of goods when the transaction occurs between the company and its customers.

Accepted Answer

The transfer price is the transaction amount of goods or services when the transaction occurs between two different subsidiaries or divisions within the same company. The transaction amount between the company and its customers is usually referred to as the selling price.

Quiz 24: Cost Allocation and Responsibility Accounting