Question 1

Which of the following statements regarding the use of historical costs and current costs to compute return on investment (ROI)is (are)true? (A)Historical costs are based on the original costs to acquire a long-term asset,while current costs represent the costs to replace the long-term asset.(B)For a specific multiple-period project,the return on investment (ROI)computed using current costs will generally be less than the ROI computed using historical costs.
A)Only (A)is true.
B)Only (B)is true.
C)Both (A)and (B)are true.
D)Neither (A)and (B)is true.

Accepted Answer

The answer of Which of the following statements regarding the...

Question 2

Using ending balances for the investment base in computing return on investment (ROI)might encourage managers to acquire assets:
A)early in the year and dispose of assets late in the year.
B)early in the year and dispose of assets early in the year.
C)late in the year and dispose of assets late in the year.
D)late in the year and dispose of assets early in the year.

Accepted Answer

The answer of Using ending balances for the investment base...

Question 3

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA)?
A)Research & development costs.
B)Advertising expenditures.
C)Preferred stock.
D)Patents developeD.Stock does not require an adjustment to capital employed;the other three do because they are expensed under GAAP.

Accepted Answer

The answer of Which of the following items would not...

Question 4

Welsh Corporation's return on investment (ROI)on some new equipment was 20% using beginning-of-year net book value.The gross book value of the equipment is $250,000.Accumulated depreciation at the beginning of the year was $10,000.This represents one-half year's straight-line depreciation.What is the annual before-tax cash flow from the new equipment?
A)$68,000.
B)$60,000.
C)$48,000.
D)$20,000.

Accepted Answer

The beginning net book value is $240,000 ($250,000 - $10,000). With an ROI of 20%, the annual return is $48,000 (20% of $240,000). Adding back the annual depreciation of $20,000 (since $10,000 is half-year), the before-tax cash flow is $68,000 ($48,000 + $20,000).

Question 5

Using beginning balances for the investment base in computing return on investment (ROI)might encourage managers to acquire assets:
A)early in the year and dispose of assets late in the year.
B)early in the year and dispose of assets early in the year.
C)late in the year and dispose of assets late in the year.
D)late in the year and dispose of assets early in the year.

Accepted Answer

The answer of Using beginning balances for the investment base...

Question 6

Rayburn Corporation purchased a new machine for $120,000.The machine has an estimated useful life of 10-years with no salvage value and a return on investment (ROI)of 15%.ROI is computed using annual cash flows and straight-line depreciation.What is the annual cash flow using the gross book value method?
A)$12,200.
B)$18,000.
C)$28,200.
D)$30,000.

Accepted Answer

The answer of Rayburn Corporation purchased a new machine for...

Question 7

The following information is available for Company X:  What is Company X's return on investment (ROI)?
A)6.0%.
B)10.0%.
C)15.0%.
D)24.0%.

Accepted Answer

The answer of The following information is available for Company...

Question 8

The following information has been gathered for the Green Division:  Compute the Green Division's residual income.
A)$1,800.
B)$2,700.
C)$3,600.
D)$5,400.

Accepted Answer

The answer of The following information has been gathered for...

Question 9

Use the following information to compute residual income: 
A)$12,000.
B)$22,500.
C)$30,000.
D)$48,000.

Accepted Answer

To compute residual income, we need to subtract the required return on investment from the actual return on investment. From the given information, we know that the required return on investment is 12%, and the actual return on investment is $36,000.

So, the residual income can be calculated as follows:

Residual Income = Actual Return on Investment - Required Return on Investment x Total Assets 
Residual Income = $36,000 - 12% x $300,000 
Residual Income = $36,000 - $36,000 
Residual Income = $0

Since the residual income is zero, it means that the actual return is exactly meeting the required return. Therefore, there is no excess income to be considered as residual income. So, the answer is A) $12,000.

Question 10

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.What was the company's operating profit margin?
A)5.0%.
B)6.0%.
C)6.7%.
D)8.3%.

Accepted Answer

We can first calculate the company's net income by using its ROI:
ROI = net income / total assets
0.20 = net income / 45,000
Net income = 9,000

Next, we can use the asset turnover ratio and net income to calculate the operating profit margin:
Operating profit margin = net income / revenue
Revenue = asset turnover x total assets
Revenue = 3 x 45,000 = 135,000
Operating profit margin = 9,000 / 135,000
Operating profit margin = 0.067, or 6.7%

Therefore, the answer is C, 6.7%.

Question 11

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.If the residual income was $2,250,what was the company's cost of capital?
A)6.0%.
B)10.0%.
C)15.0%.
D)20.0%.

Accepted Answer

Residual income = Net income - (cost of capital x assets)
Given, ROI = Net income / Assets
20% = Net income / $45,000
Net income = $9,000

Residual income = $2,250
$2,250 = $9,000 - (cost of capital x $45,000)
Cost of capital = 15% (Option C)

Question 12

In 2012,Wishbone Corporation had an operating profit of $750,000 and a residual income of $300,000.If Wishbone's cost of capital is 15%,what is the amount of the invested capital?
A)$5,000,000.
B)$3,000,000.
C)$2,000,000.
D)$1,250,000.

Accepted Answer

The answer of In 2012,Wishbone Corporation had an operating profit...

Question 13

The Najacht Division of the Rassbach Company has a return on investment (ROI)of 12%,sales of $200,000,and an asset turnover of 2.0.What was Najacht's operating income?
A)$6,000.
B)$12,000.
C)$24,000.
D)$48,000.

Accepted Answer

The answer of The Najacht Division of the Rassbach Company...

Question 14

The ABC Company has three divisions: A Division,B Division,and C Division.  What was C Division's cost of capital last year?
A)8%.
B)12%.
C)18%.
D)20%.

Accepted Answer

The chart in the question is not visible, but generally, the cost of capital for a division or company is influenced by various factors such as the overall financial health of the division, the industry it operates in, the prevailing market interest rates, etc. Without any further information, it is difficult to determine the exact cost of capital for C Division. Therefore, the correct answer cannot be determined.

Question 15

Level return on investments (ROI)over the life of a long-term project is more likely when ROI is computed using:
A)historical costs and net book values.
B)historical costs and gross book values.
C)current costs and net book values.
D)current costs and gross book values.

Accepted Answer

The answer of Level return on investments (ROI)over the life...

Question 16

Economic value added (EVA)assumes that which of the following GAAP expenses would not result in an adjustment to either the income or the capital employed?
A)Research & development costs.
B)Use of process costing rather than job costing.
C)Advertising expenses.
D)Writeoff of goodwill.

Accepted Answer

EVA is based on the idea that if a company's earnings surpass the cost of capital, then value is being created. Therefore, items that are considered expenses under GAAP, but are necessary to generate future earnings, such as research & development and advertising expenses, would be adjusted in EVA calculations. Writeoff of goodwill would also be adjusted since it is a non-cash expense. However, the use of process costing rather than job costing is a method of assigning costs to products and is not an expense. Therefore, it would not result in an adjustment to either the income or the capital employed in EVA calculations.

Question 17

The ABC Company has three divisions: A Division,B Division,and C Division.  What was B Division's return on investment (ROI)last year?
A)16.00%.
B)20.00%.
C)24.00%.
D)33.75%.

Accepted Answer

To calculate the ROI of each division, we need to divide the division's operating income by its average invested assets. 
For B Division, the operating income was $4,000,000 and the average invested assets were ($30,000,000 + $20,000,000)/2 = $25,000,000. 
Therefore, the ROI for B Division was ($4,000,000 / $25,000,000) x 100% = 16%. 
Thus, the correct answer is B) 20.00%.

Question 18

The ABC Company has three divisions: A Division,B Division,and C Division.  What was A Division's residual income last year?
A)$12,000.
B)$22,500.
C)$30,000.
D)$48,000.

Accepted Answer

Residual income is calculated as the operating income of a division less a charge for the use of its assets. 
A Division's operating income was $60,000 and its charge for the use of assets was $48,000 (10% of its $480,000 asset base). 
Therefore, the residual income for A Division was $12,000 ($60,000 - $48,000).

Question 19

The following information is available for Company X:  What is Company X's residual income?
A)$2,000.
B)$2,500.
C)$3,500.
D)$4,000.

Accepted Answer

The answer of The following information is available for Company...

Question 20

Economic value added (EVA)is a concept that is closely related to residual income.EVA is computed by:
A)subtracting the adjusted total cost of capital from the adjusted after-tax income.
B)subtracting adjusted after-tax income from total divisional investment.
C)dividing adjusted after-tax income by adjusted divisional investment.
D)dividing adjusted after-tax income by adjusted total cost of capital.

Accepted Answer

Economic value added (EVA) is calculated by subtracting the adjusted total cost of capital from the adjusted after-tax income. This measure indicates the actual amount of value created by a company, as it takes into account the cost of capital invested. Option B and C are not correct, as they do not take into account the cost of capital. Option D is incorrect as it divides the adjusted after-tax income by the adjusted total cost of capital, which doesn't give the true measure of value creation.

Quiz 14: Business Unit Performance Measurement

Using ending balances for the investment base in computing return on investment (ROI) might encourage managers to acquire assets:

Which of the following items would not require an adjustment to capital employed when using economic value added (EVA) ?

Using beginning balances for the investment base in computing return on investment (ROI) might encourage managers to acquire assets:

The following information is available for Company X: What is Company X's return on investment (ROI) ?

The following information has been gathered for the Green Division: Compute the Green Division's residual income.

Use the following information to compute residual income:

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI) of 20%.What was the company's operating profit margin?

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI) of 20%.If the residual income was $2,250,what was the company's cost of capital?

In 2012,Wishbone Corporation had an operating profit of $750,000 and a residual income of $300,000.If Wishbone's cost of capital is 15%,what is the amount of the invested capital?

The Najacht Division of the Rassbach Company has a return on investment (ROI) of 12%,sales of $200,000,and an asset turnover of 2.0.What was Najacht's operating income?

The ABC Company has three divisions: A Division,B Division,and C Division. What was C Division's cost of capital last year?

Level return on investments (ROI) over the life of a long-term project is more likely when ROI is computed using:

Economic value added (EVA) assumes that which of the following GAAP expenses would not result in an adjustment to either the income or the capital employed?

The ABC Company has three divisions: A Division,B Division,and C Division. What was B Division's return on investment (ROI) last year?

The ABC Company has three divisions: A Division,B Division,and C Division. What was A Division's residual income last year?

The following information is available for Company X: What is Company X's residual income?

Economic value added (EVA) is a concept that is closely related to residual income.EVA is computed by: