finance data bank
80. A primary goal of transfer pricing is to:
A. Agree on a price for external sales.
B. Obtain a high transfer price for the purchasing unit.
C. Obtain a high transfer price for the selling unit.
D. Motivate decision-makers to act in the best interests of the organization.
E. Minimize recordkeeping costs.
81. All of the following are true of market-based transfer prices except:
A. They generally motivate the correct economic decision.
B. They can be determined for all goods and services transferred internally.
C. They may lead to goods and services purchased externally by the purchasing unit.
D. To the extent they exist, they are objective.
E. They provide an independent valuation for internal transfers.
82. All of the following are true of cost-based transfer prices except:
A. They generally promote optimal decision-making from the standpoint of the organization as a whole.
B. They may be based either on actual costs or standard (i.e., budgeted) costs.
C. Their use may not provide proper motivation for cost control on the part of the producing division.
D. They may not provide proper guidance when opportunity costs exist.
E. Generally speaking, such cost data are readily available.
83. The greatest advantage of using a negotiated transfer price is:
A. It is generally the most efficient method of determining transfer prices.
B. This may be the most practical approach when conflicts exist between selling and buying divisions.
C.The method produces transfer prices that are acceptable under international financial reporting standards.
D. Tax problems are avoided because the method is considered "arm's-length."
E. It is required for federal income tax purposes.
84. The most likely result of using a negotiated transfer price is that:
A. The resulting decision reflects purely economic considerations.
B. More than the optimum number of units will be transferred between divisions.
C. Fewer than the optimum number of units will be transferred between divisions.
D. It takes away from the buying and selling units the ultimate responsibility for determining the transfer price.
E. The end result might reflect the relative bargaining skills of the negotiating managers.
85. All of the following represent a way of calculating ROI (return on investment) for a division except:
A. (Operating income ÷ sales) × (sales ÷ investment).
B. Operating income ÷ divisional investment.
C. Return on sales (ROS) × Inventory turnover.
D. Operating income ÷ divisional assets.
86. The primary limitation of using Economic Value Added (EVA®) to evaluate the financial performance of investment centers is:
A. Complexity of the calculation.
B. Dysfunctional long-term investment decisions that can be motivated by focusing on EVA®.
C. Failure to include a measure of invested capital.
D. Inability to use EVA® to benchmark against competitor organizations.
E. Inability to align managerial incentives with ownership interests.
88. EVA® (economic value added):
A. Is another name for return on investment (ROI).
B.Is considered an inferior method of evaluating the short-term financial performance of an investment center.
C.Encourages investment center managers to accept new investments that have an ROI greater than the existing ROI of the center.
D Of $100,000 for an investment center indicates that the investment center earned $100,000 of after-tax
. profit for the company as a whole.
E.Of $100,000 for an investment center indicates that the invest center's economic profit for the period was $100,000.
89. Which of the following specifications for calculating EVA® is correct?
A. EVA® = economic profit.
B. EVA® = economic profit ÷ equity equivalents.
C. EVA® = NOPAT ÷ investment, where NOPAT = net operating profit after (cash) taxes.
D.EVA® = NOPAT - Imputed charge on EVA® capital, where NOPAT = net operating profit after (cash) taxes
E. EVA® = reported operating profit, after tax - imputed charge on average investment in the subunit.
90. Which of the following statements regarding the calculation of EVA® is not true?
A. Adjusted accounting data are used to estimate EVA®.
B. The operating approach and the financing approach lead to identical estimates of EVA®.
C. EVA® NOPAT represents after-tax cash operating income, after depreciation
D. EVA® NOPAT represents after-tax cash operating income, before depreciation
E.The divisional cost of capital (minimum rate of return) is used to impute a charge on capital invested in the division during the period.
91. A segment of an organization is referred to as an investment center if it has:
A Authority to make decisions affecting the major determinants of profit, including the power to choose
. its markets and sources of supply.
BAuthority to make decisions affecting the major determinants of profit, including the power to choose
. its markets and sources of supply and significant control over the amount of invested capital.
C.Authority to make decisions over the most significant costs of operations, including the power to choose sources of supply.
D. Authority to provide specialized support to other units within the organization.
E. Responsibility for developing markets for and selling the output of the organization.
92. A company earning a profit can increase its return on investment (ROI) by:
A. Increasing sales revenue and operating expenses by the same dollar amount.
B. Decreasing sales revenues and operating expenses by the same percentage.
C. Increasing investment and operating expenses by the same dollar amount.
D. Increasing sales revenues and operating expenses by the same percentage.
E. Decreasing investment and sales by the same percentage.
93. Which one of the following statements pertaining to the return on investment (ROI) as a performance measure is incorrect?
A. When average age of assets differs substantially across segments of a business, the use of ROI may not
B ROI relies on financial measures that are capable of being independently verified while other forms of
. performance measures are subject to manipulation.
C The use of ROI may lead managers to reject capital investment projects that can be justified using
. discounted cash flow (DCF) decision models.
DThe use of ROI can make it undesirable for a skillful manager to take on trouble-shooting assignments
. such as those involving turning around unprofitable divisions.
E.The use of ROI can lead managers to emphasize the ROI of a division over the profitability of the parent organization.
94. The basic objective of the residual income (RI) approach to performance measurement of a business unit considered an investment center is to have the investment center maximize its:
A. Return on investment.
B. Imputed interest rate charge.
C. Cash flows.
D. Cash flows in excess of a desired minimum amount.
E. Operating income in excess of a desired minimum return.
95. In a decentralized organization, the best option for measuring the performance of subunits is through the use of:
A. Profit centers.
B. Revenue centers.
C. Product centers.
D. Cost centers.
E. Investment centers.
96. Residual income (RI) may be a better measure for financial performance evaluation of an investment center than return on investment (ROI) because:
A. Problems associated with measuring the investment base are eliminated.
B. Desirable investment opportunities will not be neglected by high-return divisions.
C. Only the gross book value of assets needs to be calculated.
D. Returns do not increase as assets are depreciated.
E. The arguments over the implicit cost of interest are largely eliminated.
97. The most likely result of a negotiated transfer price is that it:
A. Takes away the ultimate responsibility of the resulting transfer price from the two parties.
B. Decreases sub-unit (i.e., divisional) autonomy.
C. Can be costly and time-consuming to implement.
D Generally results in transferring more than the optimum number of units between the buying and
. selling divisions of the organization.
E. Provides performance indicators that are independent of the negotiating skills of divisional managers.
98. Return on investment (ROI) can be directly increased by:
A. Increasing sales.
B. Increasing the minimum desired rate of return (i.e., divisional cost of capital).
C. Decreasing operating assets.
D. Decreasing operating income.
E. Decreasing asset turnover (AT).
99. The major criticism of using return on investment (ROI) for evaluating the performance of business units consider investment centers is that ROI:
A.Gives managers of profitable business units an incentive to reject projects that would benefit the organization as a whole.
B. It is not easily understood by managers.
C. Usually uses a blended rate of capital as the required rate of return.
D.Has a long-term (strategic) focus and therefore is not useful in terms of evaluating short-term performance.
E. Favors large units (investment centers).
100.Assume that an organization's weighted-average cost of capital (minimum rate of return) is 8% and that Division A currently has a 12% return on investment (ROI). The manager of Department A, who is evaluated on the basis of divisional ROI, would most likely accept an investment that is expected to return:
A. More than 8%.
B. More than 12%.
C. More than 8% but less than 12%.
D. Less than 12%.Impossible to tell without further information.