Question 1

Which of the following is not a common alternative definition used to measure investments in divisions used in the construction of accounting-based performance measures?

Accepted Answer

Standard output is not a common alternative definition used to measure investments in divisions for constructing accounting-based performance measures. The other options (B, C, D, E) are typical measures related to the financial resources or capital employed in a division, which are used to assess its performance.

Question 2

The Wintergreen Organization,whose tax rate is 30%,generates two sources of funds: long-term debt with a market value of $7,000,000 and an interest rate of 8%,and equity capital with a market value of $12,000,000 and a cost of equity of 11%.What is Wintergreen's weighted cost of capital (WACC)?

Accepted Answer

E)[$7,000,000 × (1 - .30)× (.08))+ ($12,000,000 × .11)] / [($7,000,000 + $12,000,000] = .090

Question 3

Which of the following is the cost of purchasing an asset today identical to the one currently held?

Accepted Answer

The cost of purchasing an asset today identical to the one currently held is the current cost. This refers to the price that the asset is currently being traded at in the market. The past cost would be the cost incurred when the asset was originally purchased, which is irrelevant at this point. The future cost would be the expected cost of purchasing the asset at a later date, which is uncertain and cannot be determined accurately. Optimal and suboptimal costs refer to costs that are most efficient or least efficient in achieving a particular objective, and are not relevant in this context.

Question 4

Candy's Chocolate Company's financial management is compiling data in order to assess the favorability of the company's investments.The Boise faction of the company calculates a total investment of $2,000,000 and the operating income is computed to be $380,000 while the required rate of return is 15%.The Butte faction of the company has tallied a total investment of $1,500,000 and an operating income of $230,000 while the Butte faction also has a 15% required rate of return.
Required
Compute the residual income at the Boise faction and the residual income at the company's Butte faction.

Accepted Answer

A)[$380,000- (0.15 × $2,000,000)] = $80,000

Question 5

The imputed cost of the investment is a cost recognized in particular situations and it is always recorded in financial accounting systems.

Accepted Answer

The imputed cost of the investment is a cost recognized in particular situations and it is NEVER recorded in financial accounting systems because it is an opportunity cost.

Question 6

Which of the following is the alternative definition of all assets,regardless of their intended purpose used in the construction of accounting-based performance measures?

Accepted Answer

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

Question 7

Measuring assets at current costs will result in different ROIs compared to the ROIs calculated on the basis of ________.

Accepted Answer

Measuring assets at historical cost is the traditional method of accounting and is typically used to calculate ROIs. This method takes into account the cost of acquiring the assets at the time of purchase and does not consider any changes in the value of the assets over time. Measuring assets at current costs or future costs would result in different ROIs because these methods take into account changes in the value of the assets over time, which can vary depending on economic conditions and other factors.

Question 8

The DuPont method of profitability analysis recognizes the ________ basic ingredients in profit-making.

Accepted Answer

The answer of The DuPont method of profitability analysis recognizes...

Question 9

Contrast Crystal Company has experienced some questionable changes in both its operating income and total assets.The managerial accountant reported that operating income has decreased by 6% from $400,000 to $376,000 and its total assets have decreased by 6% from $2,025,000 to $1,900,000 in 2012.
Required
Compute the original ROI and the final ROI.

Accepted Answer

B)$400,000 = 0.198 ~ 20%; $376,000 = 0.198~20%
$2,025,000 $1,900,000

Question 10

The ________ of the investment is a cost recognized in particular situations but not recorded in financial accounting systems because it is an opportunity cost.

Accepted Answer

Imputed cost refers to an opportunity cost, which is the cost of investing in one alternative that must be forfeited in order to invest in a different alternative. It is not recorded in financial accounting systems as it is not an actual expense incurred, but rather a potential cost of the investment decision. The other options listed (B-E) do not accurately describe this concept.

Question 11

Abound Seed Company's financial manager has calculated the company's after-tax income to be $720,000.The total assets or investment of the company is $1,440,000.
Required
Compute the ROI at Abound Seed Company.

Accepted Answer

B)$720,000 = 0.5 or 50%
$1,440,000

Question 12

Which of the following is the alternative definition of total assets available minus the sum of idle assets and assets purchased for future expansion?

Accepted Answer

Total assets employed is the amount of assets being actively used in the business, which excludes idle assets and assets purchased for future expansion.

Question 13

Which of the following is not true about residual income (RI)?

Accepted Answer

Residual income (RI) is a measure used to assess the absolute dollar amount of profit that a business unit generates above a minimum required return on its operating assets. It is not about maximizing percentages, which is more related to measures like Return on Investment (ROI). Managers and stakeholders focus on RI to ensure that the absolute amount of profit exceeds a certain benchmark, which aligns with goal congruence and encourages managers to undertake projects that will positively contribute to the company's overall wealth, rather than focusing solely on percentage-based metrics.

Question 14

Why is the DuPont method of profitability analysis the preferred method?

Accepted Answer

The answer of Why is the DuPont method of profitability...

Question 15

The managerial accountant at Island Fabrics reported the following information:
  
The company wants to expand its operations,which will require each division to increase its investments by $25,000,000 and its income by $5,000,000.
Required
Compute the ROI and RI for each Division.Which Division has the largest RI? Compute the ROI and the RI with the investments and increases in income for each division.Should each division do the expansion?

Accepted Answer

The answer of The managerial accountant at Island Fabrics reported...

Question 16

The DuPont method recognizes the two basic ingredients in profit-making: increasing income per dollar of revenues and using assets to generate more revenues.

Accepted Answer

The DuPont method is based on the idea that increasing profitability requires attention to both revenue generation and asset utilization. It breaks down return on equity (ROE) into three components: net profit margin, asset turnover, and financial leverage. By improving any of these factors, a company can increase its ROE and ultimately its profitability.

Question 17

Which of the following is an accounting measure of income minus a charge for required return on an accounting measure of investment?

Accepted Answer

Residual income (RI) is the measure of income minus a charge for required return on an accounting measure of investment. It represents the economic profit of a company and is calculated by deducting a threshold rate of return (required rate of return - RRR) from the net operating income of the company's assets. Thus, option A is the correct choice. The other options are not equivalent to this measure. ROI (Return on investment) is simply the ratio of income generated to the amount invested, ARR (Accrual rate of return) is a measure of profitability of a project, and RRR (Required rate of return) is the minimum return that investors require from an investment. EVA (Economic value added) is a measure of a company's value creation that factors in the cost of capital.

Question 18

Which of the following is not true about investment bases associated with return on investment (ROI)?

Accepted Answer

The statement "Managers never have benefits when they reduce long-term assets" is not true. Reduction in long-term assets can lead to cost savings and increased efficiency, which can ultimately result in higher ROI.

Question 19

Should operating income or net income be used as the numerator to calculate ROI?

Accepted Answer

The answer of Should operating income or net income be...

Question 20

The managerial accountant at Preferential Drupelet Company is compiling data.The current net income of the company is $350,000 and the total assets are $1,005,000.
Required
Compute PDCs accrual accounting rate of return.

Accepted Answer

A)$350,000 = 0.348 ~ 35%
$1,005,000

Quiz 16: Performance Measurement and Compensation