Question 1

Basing executive compensation on accounting earnings:
I. Is a popular practice in Canada
II. Is sharply criticized because of potential negative long-term effects
III. Leads to unbiased accounting practices
A)I and II only
B)I and III only
C)II and III only
D)I, II, and III

Accepted Answer

While basing executive compensation on accounting earnings is a popular practice in Canada, it is sharply criticized for potentially encouraging short-term focus and manipulation of accounting practices, leading to negative long-term effects. Therefore, statements I and II are correct. However, it does not necessarily lead to unbiased accounting practices, so statement III is incorrect.

Question 2

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?
A)Cost
B)Profit
C)Revenue
D)Investment

Accepted Answer

The revenue centre is responsible for generating revenue, so it is most likely to use growth in sales as a performance measure. Cost centres are responsible for controlling costs, profit centres are responsible for generating profits, and investment centres are responsible for generating a return on investment.

Question 3

Decision-making based on general knowledge is more likely to occur in this type of organization:
A)Centralized
B)Decentralized
C)Effective
D)Ineffective

Accepted Answer

The answer of Decision-making based on general knowledge is more...

Question 4

Stock-based compensation has been used to encourage:
A)Focus on long-range results
B)Focus on short-term results
C)Higher compensation for executives
D)Lower compensation for executives

Accepted Answer

Stock-based compensation is a long-term incentive for employees, encouraging them to focus on the company's long-term growth and success rather than just short-term financial gains. It aligns the interests of employees with those of shareholders, making them more likely to work towards achieving the company's long-term goals.

Question 5

St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division ROI for 20x5 (rounded to nearest 0.1%)?
A)11.2%
B)13.2%
C)15.5%
D)16.0%

Accepted Answer

To calculate the ROI, we use the formula:

ROI = (Pretax operating income / Total assets) x 100%

Total assets = Current assets + Property, plant and equipment - Accumulated amortization

For 20x5:

Total assets = $120,000 + $300,000 - $80,000 = $340,000

ROI = ($52,800 / $340,000) x 100% = 15.5%

Therefore, the answer is (D).

Question 6

How are research and development costs treated for financial reporting and for economic value added (EVA)calculations? Financial Reporting EVA
A)Capitalized Capitalized
B)Expensed Expensed
C)Capitalized Expensed
D)Expensed Capitalized

Accepted Answer

For financial reporting, research and development costs are typically expensed as incurred. However, for EVA calculations, these costs are often capitalized to reflect their potential to generate future economic benefits.

Question 7

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:
A)Profit centres
B)Discretionary cost centres
C)Revenue centres
D)Investment centres

Accepted Answer

The answer of Efficiency measures, such as number of new...

Question 8

The Shannon Division of the Wasson Widget Co. requires a 12% rate of return. During a recent year Shannon had a net income of $400,000 and a residual income of $250,000. What was its ROI?
A)32%
B)15%
C)12%
D)26%

Accepted Answer

ROI = Residual Income / Invested CapitalInvested Capital = Net Income / Rate of ReturnInvested Capital = $400,000 / 12% = $3,333,333.33ROI = $250,000 / $3,333,333.33 = 32%

Question 9

St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division EVA for 20x5?
A)$3,960
B)$11,960
C)$20,460
D)$27,800

Accepted Answer

EVA (Economic Value Added) is calculated as NOPAT - (Capital * Cost of Capital). NOPAT (Net Operating Profit After Tax) for 20x5 is $52,800 * (1 - 0.30) = $36,960. Capital is calculated as (Current Assets + Property, Plant, and Equipment - Accumulated Amortization - Current Liabilities) = ($120,000 + $300,000 - $80,000 - $90,000) = $250,000. The cost of capital is 15%. Therefore, EVA = $36,960 - ($250,000 * 0.15) = $36,960 - $37,500 = -$540. However, the correct calculation should consider the weighted average cost of capital (WACC) of 10%, not the required rate of return. So, EVA = $36,960 - ($250,000 * 0.10) = $36,960 - $25,000 = $11,960.

Question 10

Budgets can be used to evaluate managerial performance in:
I. Cost centres
II. Profit centres
III. Investment centres
A)II only
B)I and II only
C)II and III only
D)I, II, and III

Accepted Answer

Budgets can be used to evaluate managerial performance in all types of centres: cost centres (focus on cost control), profit centres (focus on profitability), and investment centres (focus on return on investment).

Question 11

Managers are held responsible for revenues in:
I. Revenue centres
II. Profit centres
III. Investment centres
A)I and III only
B)II and III only
C)I only
D)I, II, and III

Accepted Answer

Managers are responsible for revenues in all three types of centers: Revenue centers focus solely on revenue generation, while Profit and Investment centers also consider revenues as part of their broader financial responsibilities.

Question 12

Which of the following best describes "general knowledge" in a decision-making context?
A)Detailed information about manufacturing processes
B)Customer lists and preferences kept by individual departments in retail sales
C)Knowledge that is easily transferred between employees
D)Knowledge that can be obtained only outside the organization

Accepted Answer

General knowledge refers to information that is widely available or easily transferred between employees within an organization. It can include industry trends, basic business principles, and commonly used technologies. Options A and B refer to specific information that may be relevant to a particular organization or department, while option D suggests that the knowledge is not available within the organization.

Question 13

An advantage of centralized decision making is:
A)More motivated employees
B)More rapid decision-making in all contexts
C)Greater effectiveness in volatile environments
D)Less monitoring of decisions

Accepted Answer

The answer of An advantage of centralized decision making is:
A)More...

Question 14

To protect shareholders from excessive compensation practices, executive compensation packages are best set by:
A)The board of directors
B)A committee of primarily outside members of the board of directors
C)A committee of top management employees
D)The external auditors

Accepted Answer

A committee of primarily outside members of the board of directors is best to set executive compensation packages as they can provide an objective evaluation of the executive's performance and ensure that the compensation is aligned with the company's long-term goals. A committee of top management employees might be biased towards executives' interests, while external auditors are not involved in setting compensation policies. The board of directors may not have the expertise or time required to set executive compensation packages.

Question 15

The Eastern Division of WDY Corporation reported net income of $2,500, operating income of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Eastern's required rate of return is 12%, its residual income was
A)380
B)$(380)
C)$400
D)$1,100

Accepted Answer

The answer of The Eastern Division of WDY Corporation reported...

Question 16

A corporate accounting department would most often be considered a:
A)Cost centre, because it is typically a high cost operation
B)Cost centre, because its costs can be controlled by upper management
C)Revenue centre, if accountants have input in pricing decisions
D)Cost centre, because it is a support service

Accepted Answer

A corporate accounting department is a support service that does not directly generate revenue for the company. Therefore, it would be considered a cost centre, as its primary function is to provide necessary support to other departments within the organization.

Question 17

Economic value added uses "adjusted after-tax operating income" as one of its inputs. One purpose of using after-tax income, rather than operating income, is to:
A)Encourage managers to file tax reports
B)Encourage managers to minimize taxes
C)Improve information reported to the SEC
D)Remove bias from the EVA calculation

Accepted Answer

Using after-tax income instead of operating income encourages managers to minimize taxes, as a lower tax burden would result in higher after-tax income, and subsequently a higher EVA. This incentivizes managers to make decisions that not only improve operating income, but also reduce the tax burden on the company.

Question 18

St. John's Division has a required rate of return of 15%. The weighted average cost of capital is 10%. Information for St. John's Divisions operations over the past 2 years follows: 20x5 20x4
Current assets $120,000 $100,000
Property, plant and equipment (cost)300,000 280,000
Accumulated amortization 80,000 60,000
Current liabilities 90,000 70,000
Long-term debt 85,000 80,000
Pretax operating income 52,800 48,900
Income tax rate 30% 30%
What was the St. John's Division residual income for 20x5?
A)$(12,540)
B)$3,300
C)$15,300
D)$19,800

Accepted Answer

The answer of St. John's Division has a required rate...

Question 19

Which type of knowledge is most costly to transfer within an organization?
A)Centralized
B)Decentralized
C)Financial
D)Specific

Accepted Answer

Specific knowledge is the most costly to transfer within an organization because it is often specialized and requires extensive training or experience to acquire. This type of knowledge may also be proprietary or confidential, making it harder to transfer without legal or other restrictions. Centralized and decentralized knowledge can be more easily shared through communication and collaboration tools, while financial knowledge is mainly concerned with numbers and data that can be easily tracked and reported.

Question 20

Responsibility accounting includes:
I. Monitoring primarily for mistakes
II. Assigning authority to subunit managers
III. Measuring the performance of subunit managers
A)I and II only
B)I and III only
C)II and III only
D)I, II, and III

Accepted Answer

Responsibility accounting involves assigning authority to subunit managers and measuring their performance. It is not primarily about monitoring mistakes, so option I is incorrect. Therefore, options II and III are both required for responsibility accounting, making option C the correct choice.

Quiz 16: Performance Evaluation and Compensation

Basing executive compensation on accounting earnings: I. Is a popular practice in Canada II. Is sharply criticized because of potential negative long-term effects III. Leads to unbiased accounting practices

Among the responsibility centres listed, which type of responsibility centre is most likely to use growth in sales as a performance measure?

Decision-making based on general knowledge is more likely to occur in this type of organization:

Stock-based compensation has been used to encourage:

How are research and development costs treated for financial reporting and for economic value added (EVA) calculations? Financial Reporting EVA

Efficiency measures, such as number of new products developed, may be more useful than financial measures in:

The Shannon Division of the Wasson Widget Co. requires a 12% rate of return. During a recent year Shannon had a net income of $400,000 and a residual income of $250,000. What was its ROI?

Budgets can be used to evaluate managerial performance in: I. Cost centres II. Profit centres III. Investment centres

Managers are held responsible for revenues in: I. Revenue centres II. Profit centres III. Investment centres

Which of the following best describes "general knowledge" in a decision-making context?

An advantage of centralized decision making is:

To protect shareholders from excessive compensation practices, executive compensation packages are best set by:

The Eastern Division of WDY Corporation reported net income of $2,500, operating income of $4,000, average equity of $24,000, and average operating assets of $30,000 in a recent accounting period. If Eastern's required rate of return is 12%, its residual income was

A corporate accounting department would most often be considered a:

Economic value added uses "adjusted after-tax operating income" as one of its inputs. One purpose of using after-tax income, rather than operating income, is to:

Which type of knowledge is most costly to transfer within an organization?

Responsibility accounting includes: I. Monitoring primarily for mistakes II. Assigning authority to subunit managers III. Measuring the performance of subunit managers