Deck 25: Rewarding Business Performance

Question 1

A stock option is a right to sell a certain number of shares at a specific price sometime in the future.

Answer 1

False

Question 2

Capital turnover is equal to sales divided by average invested capital.

Answer 2

True

Question 3

The value chain starts with the supplier and ends with the consumer.

Answer 3

True

Question 4

Residual income is calculated by subtracting the minimum acceptable return on the average invested capital from the operating income.

Question 5

To increase return on sales,a manager could decrease cost of goods sold while increasing revenues.

Question 6

The return on investment is calculated by multiplying the capital turnover by the return on sales.

Question 7

The balanced scorecard approach attempts to measure whether an organization is meeting its strategic goals.

Question 8

A common criticism of capital ROI as a performance measurement criterion is that it encourages a long-term orientation sometimes to the detriment of shorter-term planning.

Question 9

The main objective of the balanced scorecard system of performance measurement is achieving the organization's strategic goals.

Question 10

Operating earnings rather than net income is used to compute return on sales.

Question 11

Capital turnover can be improved by reducing invested capital while keeping sales constant.

Question 12

Accounting systems do not offer any benefit to management in generating and focusing employee motivation.

Question 13

Capital turnover is calculated by dividing operating income by average invested capital.

Question 14

Most organizations try to achieve their goals by providing incentives to employees who use resources wisely.

Question 15

Return on investment (ROI)tells us how much earnings can be expected for the average invested dollar.

Question 16

Residual income is the difference between net operating income at breakeven and actual net operating income.

Question 17

EVA stands for "evaluating value added" performance.

Question 18

Return on investment indicates the profitability that can be expected from one dollar of sales.

Question 19

The value chain consists of only those activities that increase the selling price of a product as it is distributed to a customer.

Question 20

Using only ROI as a business performance measure often leads to the best decisions.

Question 21

The Parry Company provided the following information regarding its operations: What is Parry's ROI for the year ending 2018? (Round your answer to 2 decimal places. )

A)1.50%
B)2.72%
C)1.76%
D)1.82%

Question 22

[The following information applies to the questions displayed below.]
The following information regarding Mahen,Inc.is available:

What is the return on sales for Mahen,Inc.?

A)5%
B)6%
C)10%
D)20%

Question 23

[The following information applies to the questions displayed below.]
The following information regarding Brookes,Inc.is available:

What is the capital turnover for Brookes,Inc.? (Round your percentage answer to the nearest whole number. )

A)38%
B)54%
C)70%
D)86%

Question 24

The Lastrom Company provided the following information regarding its operations: What is Lastrom's ROI for the year ending 2018?

A)2.48%
B)2.72%
C)2.40%
D)2.50%

Question 25

Which of the following is not a way an accounting system can generate motivation?

A)The accounting system can help create and set goals through the budgeting process.
B)The accounting system can introduce punitive measures for employees that do not achieve goals,for example,limiting pay.
C)The accounting system can provide feedback and progress updates periodically.
D)The accounting system can provide information to allocate rewards appropriately.

Question 26

[The following information applies to the questions displayed below.]
The following information regarding Mahen,Inc.is available:

What is the capital turnover for Mahen,Inc.?

A)166%
B)5%
C)10%
D)60%

Question 27

Dwyer Company's ROI is 6% and its return on sales is 16%.What is its capital turnover?

A)3%
B)37.5%
C)300%
D)Some other percentage

Question 28

Clancy Stores has sales of $1,574,000,cost of sales of $653,000,and operating expenses of $292,000.What is Clancy's return on sales?

A)58.5%
B)41.5%
C)60%
D)40%

Question 29

Stock based performance evaluation of managers is considered more risky than accounting based performance evaluation.

Question 30

Which ratio tells managers about how the invested capital is generating sales dollars?

A)Return on investment
B)Receivable turnover
C)Capital turnover
D)Return on sales

Question 31

Which of the following is not one of the components of the DuPont system for measuring and evaluating business performance?

A)Return on sales
B)Return on investment
C)Inventory turnover
D)Capital turnover

Question 32

[The following information applies to the questions displayed below.]
The following information regarding Brookes,Inc.is available:

What is the return on sales for Brookes,Inc.? (Round your percentage answer to the nearest whole number. )

A)13%
B)19%
C)9%
D)70%

Question 33

Which of the following accounting system characteristics cannot generate motivation?

A)Creating and setting goals
B)Measuring progress towards those goals
C)Allocating rewards towards goal achievement
D)Balancing debits and credits

Question 34

[The following information applies to the questions displayed below.]
The following information regarding Mahen,Inc.is available:

What is the return on investment for Mahen,Inc.?

A)5%
B)6%
C)10%
D)20%

Question 35

Which of the following measures the amount of sales dollars generated from each dollar of capital invested in assets?

A)Return on sales
B)Return on investment
C)Accounts receivable turnover
D)Capital turnover

Question 36

The return on investment is calculated by:

A)Multiplying the capital turnover by the return on sales.
B)Dividing the capital turnover by the return on sales.
C)Dividing average invested capital by sales.
D)Multiplying operating income by capital turnover.

Question 37

Bonuses may be used to reward employees who meet performance goals.

Question 38

[The following information applies to the questions displayed below.]
The following information regarding Brookes,Inc.is available:

What is the return on investment for Brookes,Inc.? (Round your percentage answer to the nearest whole number. )

A)70%
B)19%
C)13%
D)9%

Question 39

Morgan Company has a ROI of 5% and a capital turnover of 8%.What is its return on sales?

A)133%
B)75%
C)62.5%
D)Some other percentage

Question 40

A system that considers the earnings per sales dollar and the investment used to generate those sales dollars is called:

A)The economic value added system.
B)The balanced scorecard system.
C)The DuPont system.
D)The residual income system.

Question 41

Calculate the residual income assuming the following information:

A)$156,000
B)$108,000
C)$219,000
D)$45,000

Question 42

In considering customer's needs,the balanced scorecard method will look at:

A)Market share growth and customer retention.
B)Return on sales and sales turnover.
C)Residual income and return on investment.
D)Organizational procedures and information systems.

Question 43

Which of the following is not one of the strategies of the financial perspective lens of the balanced scorecard?

A)Improve shareholder perspectives
B)Improve credit rating
C)Improve customer relations
D)Reduce risk

Question 44

Which of the following is not one of the balanced scorecard lenses?

A)Financial perspective
B)Learning and growth perspective
C)Production perspective
D)Business process perspective

Question 45

Which of the following statements is most correct about Return on Investment,Economic Value Added,and Residual Income?

A)ROI was developed in response to criticisms levied against EVA.
B)RI is a refinement of the EVA measure.
C)ROI is a refinement of the RI measure.
D)EVA and RI were developed in response to criticisms levied against ROI.

Question 46

The value chain usually starts with the ________ and ends with the ________.

A)Supplier,customer.
B)Retailer,wholesaler.
C)Customer,retailer.
D)Retailer,customer.

Question 47

The set of activities necessary to create and distribute a desirable product or service to a customer is known as:

A)A customer perspective.
B)Business process perspective.
C)Balanced scorecard.
D)Value chain.

Question 48

[The following information applies to the questions displayed below.]
Division Y of the Mortisen Company produces and sells two products.Each product's operating income and average capital resources are shown below:
Product A: Operating Income $500,000;Average capital $5,000,000.
Product B: Operating Income $350,000;Average capital $4,100,000.
What is division Y's ROI for product A?

A)12.0%
B)10.0%
C)11.0%
D)12.5%

Question 49

In an effort to boost his department's ROI,the manager of an automobile repair shop prioritizes repairs that use his department's car lift (its major capital investment).However,the car company's CEO would actually prefer that a more comprehensive approach to car repairs be used across multiple departments.The CEO's favored approach would be better for the company overall,although it would hurt the department manager's personal ROI.Which of the following would be an appropriate response?

A)No response is needed.The manager should continue to prioritize his own ROI.
B)The company should eliminate ROI entirely from its performance evaluations since it can be so easily abused.
C)The company should combine multiple divisions together so ROI is better aligned with the CEO's goals.
D)The company should consider adopting multiple performance measures,in addition to ROI,to evaluate the department manager's performance in line with the company's overall objectives.

Question 50

Which of the following is not an example of a "perk" that might be part of a management compensation package?

A)The company provides stock options to its senior-level employees when they meet certain performance objectives.
B)A furnished apartment provided to the CEO so she does not have to commute each day.
C)Chauffeured transportation to and from an executive's home so he may review reports during his commute.
D)Round-trip airfare on the company's private jet is available for all executive-level supervisors so they may oversee multiple geographical divisions of the company.

Question 51

Assuming division Y's manager has an opportunity to undertake an investment that would require a $500,000 investment and yield $40,000 in net operating income for its product B,what would the ROI be for the entire division? (Round your percentage answer to the nearest whole number. )

A)11%
B)10%
C)9%
D)8%

Question 52

Which of the following is not a strategy of the learning and growth lens of a balanced scorecard?

A)Improve employee relations
B)Improve customer relations
C)Improve employee productivity
D)Increase new product development

Question 53

Which of the following statements correctly describes management compensation options?

A)Managers do not receive fixed salaries;instead their compensation is based on bonuses and incentives.
B)Perks (perquisites)were eliminated as part of the Sarbanes-Oxley Act.
C)Bonuses are typically awarded for meeting or achieving specific goals.
D)Stock options and awards are part of fixed salary compensation.

Question 54

[The following information applies to the questions displayed below.]
Division Y of the Mortisen Company produces and sells two products.Each product's operating income and average capital resources are shown below:
Product A: Operating Income $500,000;Average capital $5,000,000.
Product B: Operating Income $350,000;Average capital $4,100,000.
What is division Y's ROI for product B? (Round your percentage answer to the nearest whole number. )

A)12.0%
B)10.0%
C)9.0%
D)13.0%

Question 55

Which of the following is not a criticism of using ROI as the only performance measure?

A)It may incentivize short-term decisions at the expense of long-term planning.
B)It may incentivize decisions that are effective at the division-level,but not necessarily at the enterprise-level.
C)It may incentivize employees to act in ways that are consistent with the overall goals and objectives of the organization.
D)It may be too reliant on subjective or arbitrary allocations of capital.

Question 56

Residual income can be defined as:

A)Income remaining after dividends are paid out.
B)Operating earnings minus return on investment.
C)Operating earnings plus a minimum acceptable return times average invested capital.
D)Operating earnings minus a minimum acceptable return times average invested capital.

Question 57

The primary reason for using a performance measure,such as ROI,is to:

A)Motivate organizations to embrace strategic plans that are consistent with employee goals.
B)Motivate the CEO and CFO to maintain their stock holdings in the company.
C)Motivate employees to make decisions consistent with goals and objectives of the organization.
D)Motivate employees to hold stock in the company for long-term periods.

Question 58

Which of the following is not a measure used by the financial perspective lens of the balanced scorecard?

A)ROI
B)EVA
C)Residual income
D)Net operating income

Question 59

One of the strategies of the business process perspective lens of the balanced scorecard is to improve the quality of the manufacturing process.Which of the following is not one of the measures?

A)Number of on-time deliveries
B)Machine downtime
C)Percent of orders filled
D)Scrap as a percentage of raw materials

Question 60

Management compensation plans:

A)May be affected by adopting International Financial Reporting Standards since earnings under IFRS are typically higher than GAAP earnings.
B)May be affected by adopting International Financial Reporting Standards since earnings under IFRS are typically lower than GAAP earnings.
C)Will not be affected by IFRS since earnings are equivalent to GAAP.
D)Are decided by shareholders who do not consider GAAP or IFRS when deciding how much compensation managers receive.

Question 61

Calculate and explain residual income and economic value added.

Question 62

Explain the importance of incentive systems for motivating performance.

Question 63

Identify the criticisms of using Return on Investment (ROI)as the only performance measure.

Question 64

The following information regarding the Duncan Company is available:
Compute the answers for items A-D.

Question 65

Listed below are eight accounting terms introduced or emphasized in this chapter: Each of the following statements may (or may not)describe one of these technical terms.In the space provided,indicate the accounting term described,or answer "none" if the statement does not correctly describe any of the terms.
(a)________ is the amount by which operating earnings exceeds a minimum acceptable return on the average invested capital.The minimum rate of return represents the opportunity cost of using the invested capital.
(b)________ is the operating income divided by the average invested capital associated with the generation of that income.
(c)________ is computed by dividing the operating income by the total sales for a particular business segment or product line.It tells managers the amount of earnings generated from a dollar of sales.
(d)________ give an employee the right to purchase a pre-specified number of shares at a pre-specified price within a certain future time period.They provide incentives for managers to increase stock prices.
(e)________ is the set of activities necessary to create and distribute a desirable product or service to a customer.
(f)________ is a specific type of residual income.It is computed by multiplying weighted average cost of capital by total assets minus current liabilities,and subtracting that product from the after-tax operating income.
(g)________ is a measure created by dividing sales by the average invested capital to generate those sales.It tells managers the amount of sales generated by a dollar of invested capital.
(h)________ is a system for performance measurement that links a company's strategy to specific goals,assesses progress towards those goals,and measures specific initiatives to achieve those goals.It is a systematic attempt to create a business performance measurement process that integrates objectives across four business lenses to achieve the organization's strategic goals.

Question 66

Identify and explain the components of management compensation and the tradeoffs that compensation designers make.

Question 67

Define the measurement model known as the DuPont system used for evaluating business performance.

Question 68

The following information is available for the Hancock Company.
Compute the answers for items A-D.

Question 69

How is the balanced scorecard used to identify,evaluate,and reward business performance?