finance data bank
1. Under the notion of controllability, it is most appropriate for top management to evaluate the profitability of an investment center in terms of:
A. Profits in relation to the amount of capital invested in the unit.
B. Returns expressed as a percentage.
C. Profits expressed in absolute terms.
D. Operating profit generated.
E. Returns expressed in actual dollar amounts.
2. Which of the following is the most appropriate and comprehensive short-term financial-performance indicator for an investment center that is a division of a larger business entity?
A. Residual income (RI).
B. Operating income, pre-tax
C. Return on equity (ROE).
D. Operating income, after-tax.
E. Return on sales (ROS).
3. The conventional return on investment (ROI) performance measure calculates "profit" and "investment" based on:
A. American Accounting Association (AAA) recommendations.
B. Generally Accepted Accounting Principles (GAAP).
C. The American Institute of Certified Public Accountants (AICPA) regulations.
D. The legal and business professions' practices.
E. Ordinary and customary practices in accounting.
4. Return on investment (ROI) is the result of multiplying:
A. Return times average investment.
B. Profit times average operating assets.
C. Return on sales (ROS) times asset turnover (AT).
D. Return on assets (ROA) times asset turnover (AT).
E. Margin on sales times return on assets (ROA).
5. Determination of the useful life of an asset and choice of a depreciation method will affect all of the following except:
A. The amount of operating income earned by an investment center for any given period.
B. The investment base for purposes of calculating ROI.
C. Amount of depreciation expense recorded for any given period.
D. Net book value (NBV) of an asset as of any point in time.
E. The opportunity cost of lost sales on alternative projects.
6. The choice of valuation method for inventories would normally not affect which item(s) used in calculating ROI?
A. The valuation of fixed assets (e.g., Plant, Property, and Equipment) used by an investment center.
B. The amount of operating income earned by an investment center in a given period.
C. Both the investment base and the level of operating income reported by an investment center.
D. The estimated value of current assets of a business entity, such as an investment center.
E. The return on sales (ROS) of an investment center for the period.
7. As a general rule, leased assets should be included as part of the calculation of "investment" (for calculating ROI and residual income) since they represent assets used:
A. As collateral to borrow funds.
B. To generate operating income.
C. To offset current operating expenses.
D. To reduce taxes.
E. To estimate earnings per share for a given period.
8. Firms with high operating leverage tend to have:
A. High asset turnover and high return on sales.
B. Low asset turnover and low return on sales.
C. Low asset turnover and high return on sales.
D. High asset turnover and low return on sales.
E. Decreased levels of short-term fixed costs.
9. Which one of the following is an advantage of both ROI and Residual Income (RI)?
A They both measure all elements important for measuring short-term financial performance of
. investment centers: revenues, costs, and investment.
B. They are both very widely used.
C.They both can use the minimum rate of return to adjust for differences in risk across different investment centers.
D. They are both comparable to interest rates and to rates of return on alternate investments.
E.They can both use a different minimum rate of return for different types of assets used by an investment center.
10. When investments in facilities are shared by different subunits in a firm, allocation of cost of these common facilities to sharing units should be determined by:
A. Reference to Generally Accepted Accounting Principles (GAAP).
B. Amount of capacity only.
C.The relative amount of use of the facilities, or demand for the facilities, by the various investment centers in the organization.
D. Special techniques prescribed by the AICPA.
E. Some measure of current value (e.g., replacement cost).
11. The difference between the historical cost and the net book value (NBV) of a plant asset is the:
A. Residual value of the asset.
B. Depreciation expense for the current period.
C. An estimate of the remaining useful life of the asset.
D. Accumulated depreciation expense of the asset.
E. Estimated replacement cost of the asset.
12. Use of net book value (NBV) in valuing investment in operating plant assets, in contrast to using current value, will:
A. Have no appreciable effect on ROI.
B. Have no appreciable effect on plant asset book value.
C. Have no appreciable effect on operating income.
D. Usually understate ROI.
E. Usually overstate ROI.
13. The use of gross book value (GBV) for measuring the level of investment in depreciable assets (for purposes of calculating return on investment, ROI) is preferred by those who value the objectivity of:
A. An historical cost number.
B. The depreciation process.
C. Price-level adjusted data.
D. A declining book value.
E. Current-cost information.
14. The use of replacement cost of assets for purposes of calculating ROI has the advantage(s) of:
A. Historical accuracy.
B. Being a sound and relevant measure of the level of investment in a continuing business.
D. Consistency with generally accepted accounting principles (GAAP).
E. Avoiding the need for developing estimates of current cost.
15. A primary limitation of ROI as a performance-evaluation metric for investment centers is that ROI:
A. Is a long-term, not short-term, performance indicator.
B. Excludes the level of investment from the performance metric.
C. Understates the level of "investment" for organizations operating in the knowledge-based economy.
D. Cannot handle current-value estimates of assets.
E. Is not a relative performance indicator.
16. Return on investment (ROI) encourages business units—such as investment centers— to invest only in projects that earn:
A. A rate of return greater than borrowing costs.
B. An amount greater than the amount of EVA® currently being generated.
C. A rate of return greater than the amount of residual income currently being earned.
D. A rate of return less than the unit's current ROI.
E. A rate of return higher than the unit's current ROI.
17. Because residual income (RI) is a dollar amount, in contrast to a percentage (as is return on investment, ROI), RI:
A.Allows, through different discount rates, adjustment for differing levels of risk across investment centers within an organization.
B. Cannot be used to evaluate the financial performance of a given investment center over time.
C. Is less useful than ROI for performance-evaluation purposes.
D. Allows for differing investment amounts for different investment centers.
E. Is less useful to stockholders of the company.
18. Since residual income (RI) is not a percentage, it is not useful for:
A. Comparing business units of significantly different size.
B. Evaluating the performance of subunits with high ROIs.
C. Motivating goal-congruent behavior on the part of divisional managers.
D. Evaluating the short-term financial performance of small divisions.
E. Evaluating the short-term financial performance of larger divisions.
19. In contrast to residual income (RI), economic value added (EVA®) uses:
A. The firm's cost of capital rather than its minimum rate of return.
B. A measure (or estimate) of economic, not accounting, income.
C. A required rate of return in estimating the amount of profit generated.
D. Values determined by using conventional accounting policies (i.e., GAAP).
E. Accounting, not economic, measures of income and investment.
20. Put simply, transfer pricing is a management tool for assigning a "price" to internally transferred goods (or services) in order to simulate the marketplace, thus encouraging mangers to make decisions that are in the best interest of the:
A. Operating managers.
B. Producing (i.e., selling) unit within the firm.
C. Firm as a whole.
D. Manager of the buying (i.e., purchasing) unit.
E. Operating units in the short run, and the firm in the long-run.
21. Because the full-cost method of transfer pricing includes fixed cost, it can:
A. Pass strict accounting requirements for determining transfer prices.
B. Pass strict income tax requirements for determining transfer prices.
C. Establish consistency across state and national borders.
D. Violate OECD agreements.
E. Cause sub-optimal short-term decision making.
22. Use of the market-price method (when such prices exist) satisfies a key objective of transfer pricing, namely:
23. A key standard in international transfer pricing is:
C. The arm's-length standard.
D. Open marketability.
24. The biggest problem with cost-based transfer prices is:
A. The fact that their use may result in sub-optimal decisions from the standpoint of the organization as a whole.
B. Too much negotiation is involved in determining the transfer price.
C. Data unavailability.
D. They are difficult to put into place.
E. They may lead to goal congruence within the firm.
25. If after-tax income of Grey Division, adjusted for economic value, is 15% of sales, capital employed is $5,000,000 (adjusted for equity-equivalents), the divisional cost of capital (discount rate) is 8%, and sales are $12,000,000, then EVA® is:
D. $3,200,000Undeterminable given the information above.