Question 1

In general,a division's investment base includes an allocated share of the corporate headquarters' assets.

Accepted Answer

A) True 
 B)False

Question 2

The Dry Wall Division reports the following operating data for the past two years: 
$$\begin{array} { | l | r | r | } 
\hline \text { Margin } & \text { Year 1 } & \text { Year 2 } \
\hline \text { Turnourer } & 16 \% & ? \
\hline \text { Average operating assets } & 2.5 & 2 \
\hline \text { Net operating income } & \$ 40,000 & ? \
\hline \text { Stockholders' equity } & \$ 80,000 & \$ 125,000 \
\hline \text { Sales } & ? & ? \
\hline
\end{array}$$The return on investment at the Dry Wall Division was exactly the same in Year 1 and Year 2.Net operating income in Year 2 amounted to:

Accepted Answer

A)  $60,000. 
B)  $50,000. 
C)  $40,000. 
D)  $35,000. 
A)  $60,000. 
B)  $50,000. 
C)  $40,000. 
D)  $35,000.

Question 3

Edmonson Corporation had net operating income of $150,000 and average operating assets of $500,000.The company requires a return on investment of 19%.Required:
a.Calculate the company's current return on investment and residual income.b.The company is investigating an investment of $400,000 in a project that will generate annual net operating income of $78,000.What is the return on investment of the project? What is the residual income of the project? Should the company invest in this project?

Accepted Answer

a.Return on investment = Net operating i

Question 4

How does EVA differ from residual income?

Accepted Answer

While residual income and economic value

Question 5

Which of the following is not an advantage of after-tax income as a performance measure?

Accepted Answer

A)  It reflects the results of decisions under the division manager's control. 
B)  It summarizes the results of decisions affecting revenues and costs. 
C)  It makes comparison of divisions easy because they use the same measure,dollars of income. 
D)  Financial accounting income at the divisional level is computed differently from that of the income for the firm. 
A)  It reflects the results of decisions under the division manager's control. 
B)  It summarizes the results of decisions affecting revenues and costs. 
C)  It makes comparison of divisions easy because they use the same measure,dollars of income. 
D)  Financial accounting income at the divisional level is computed differently from that of the income for the firm.

Question 6

Mrs.Young is the manager of the Children's Toy division of Ferguson Corporation.Every year she just misses the cut off established by the company for the awarding of bonuses.She is concerned inasmuch as she believes she is running her division effectively and her income has been increasing slowly but steadily over the years she has been with the company.She knows that the company uses ROI as the performance measure to evaluate divisions and begins to study the formula to see what she should do to improve the ROI for her division.Required:
Briefly discuss several ways to improve ROI.

Accepted Answer

ROI = income/invested capital = (income/

Question 7

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

Accepted Answer

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. 
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.

Question 8

Tran Company has the following financial statements for the year ended December 31,2016.  $\quad $  Tran Compary
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $Balance Sheet
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $For 2016
$\begin{array}{|l|r|}
\hline \text { Cash } & \$ 1,600,000 \
\hline \text { Accounts Receivable } & 3,000,000 \
\hline \text { Inventory } & \underline{2,500,000} \
\hline \text { Current Assets } & \$ 7,100,000 \
\hline \text { Long-Lived Assets } & \underline{14,500,000 }\
\hline \text { Total Assets } & \$ 21,600,000 \
\hline \text { Current Liabilities } & \$ 1,200,000 \
\hline \text { Long-Term Debt } & 2,400,000 \
\hline \text { Shareholder Equity } & 18,000,000 \
\hline \text { Total Debt and Equity } &\underline{ \$ 21,600,000} \
\hline
\end{array}$
  $\quad $ $\quad $ $\quad $ $\quad $ $\quad $Tran Compary
 $\quad $ $\quad $ $\quad $ $\quad $Income Statement
 $\quad $ $\quad $ $\quad $For $Y$ ear Ended Dec. 31, 2016
$\begin{array}{|c|r|}
\hline \text { Sales } & \$ 20,000,000 \
\hline \text { Cost of Sales } & 15,000,000 \
\hline \text { Gross Margin } & \$ 5,000,000 \
\hline \text { Operating Expenses } & 2,500,000 \
\hline \text { Operating Income } & \$ 2,500,000 \
\hline \text { Taxes } & 1,000,000 \
\hline \text { Net Income } & \$ 1,500,000 \
\hline
\end{array}$  
  $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $Tran Compary
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $Cash Flows from Operations
 $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $ $\quad $For Y ear Ended Dec. 31, 2016
$\begin{array}{|l|r|}
\hline \text { Net Income } & \$ 1,500,000 \
\hline \text { Plus Depreciation Expense } & 1,000,000 \
\hline \text { + Decrease (- Inc rease) in Acct. Rec. \& } & \
\begin{array}{l}
\text { Inventory }
\end{array} & \
\hline \text { + Increase (-Dec rease) in Current Liabilities } & \
\hline \text { Cash Flows from Operations } & \$ 2,500,000 \
\hline
\end{array}$Some additional information about 2016 includes: 
 Required:
1.Complete a business analysis of Tran Company for 2016.2.Complete a business valuation for Tran Company for 2016.

Accepted Answer

1. Note: capital invested for EVA includ

Question 9

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000.The cash flows from these assets for the past three years have been: 
$$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash flows } \
\hline 1 & \$ 1,200,000 \
\hline 2 & \$ 1,400,000 \
\hline 3 & \$ 1,620,000 \
\hline
\end{array}$$ The current (i.e. ,replacement)costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;the estimated useful life is 10-years with no salvage value.For return on investment (ROI)calculations,Marvin uses end-of-year balances.What is the residual income for each year,assuming the cost of capital is 15% and Marvin uses historical costs and net book values to compute residual income?$$\begin{array} { | l l | c l | } 
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { A. } & \$ 200,000 & \$ 435,000 & \$ 690,000 \
\hline \text { B. } & \$ 260,000 & \$ 520,000 & \$ 800,000 \
\hline \text { C. } & \$ 260,000 & \$ 420,000 & \$ 540,000 \
\hline \text { D. } & \$ 280,000 & \$ 400,000 & \$ 750,000 \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 10

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

Accepted Answer

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. 
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.

Question 11

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

Accepted Answer

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. 
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.

Question 12

Sales and average operating assets for Wyeth Company and Genesis Company are given below: 
$$\begin{array} { | l | r | r | } 
\hline & \text { Sales } & \text { Average Operating Assets } \
\hline \text { Wyeth Company } & \$ 20,000 & \$ 8,000 \
\hline \text { Genesis Company } & \$ 50,000 & \$ 10,000 \
\hline
\end{array}$$What is the margin that each company will have to earn in order to generate a return on investment of 20%?

Accepted Answer

A)  12% and 16%. 
B)  50% and 100%. 
C)  8% and 4%. 
D)  2.5% and 5%. 
A)  12% and 16%. 
B)  50% and 100%. 
C)  8% and 4%. 
D)  2.5% and 5%.

Question 13

One division of the Marvin Educational Enterprises has depreciable assets costing $4,000,000.The cash flows from these assets for the past three years have been: 
$$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash flows } \
\hline 1 & \$ 1,200,000 \
\hline 2 & \$ 1,400,000 \
\hline 3 & \$ 1,620,000 \
\hline
\end{array}$$The current (i.e. ,replacement)costs of these assets were expected to increase 25% each year.Marvin used the straight-line depreciation method;the estimated useful life is 10-years with no salvage value.For return on investment (ROI)calculations,Marvin uses end-of-year balances.What is the residual income for each year,assuming the cost of capital is 15% and Marvin uses historical costs and gross book values to compute residual income?$$\begin{array} { | l l | c l | } 
\hline & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \
\hline \text { A. } & \$ 200,000 & \$ 400,000 & \$ 620,000 \
\hline \text { B. } & \$ 200,000 & \$ 200,000 & \$ 200,000 \
\hline \text { C. } & \$ 250,000 & \$ 200,000 & \$ 450,000 \
\hline \text { D. } & \$ 250,000 & \$ 400,000 & \$ 375,000 \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D 
A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 14

Which of the following will not result in an increase in the residual income,assuming other factors remain constant?

Accepted Answer

A)  An increase in sales. 
B)  An increase in the minimum required rate of return. 
C)  A decrease in expenses. 
D)  A decrease in operating assets. 
A)  An increase in sales. 
B)  An increase in the minimum required rate of return. 
C)  A decrease in expenses. 
D)  A decrease in operating assets.

Question 15

Imagination Corporation uses residual income to evaluate the performance of its divisions.Imagination's minimum required rate of return is 11%.In April,the Commercial Products Division had average operating assets of $100,000 and net operating income of $9,400.What was the Commercial Products Division's residual income in April?

Accepted Answer

A)  $(1,600). 
B)  $1,600. 
C)  $1,034. 
D)  $(1,034). 
A)  $(1,600). 
B)  $1,600. 
C)  $1,034. 
D)  $(1,034).

Question 16

Big Sky Industries is a division of a major corporation.The following data are for the latest year of operations:$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 24,900,000 \
\hline \text { Net operating income } & \$ 1,319,700 \
\hline \text { Average operating assets } & \$ 6,000,000 \
\hline \begin{array} { l } 
\text { The company's minimum required rate of } \
\text { return }
\end{array} & 12 \% \
\hline
\end{array}$$ 
Required:
a.What is the division's margin?
b.What is the division's turnover?
c.What is the division's return on investment (ROI)?
d.What is the division's residual income?

Accepted Answer

a.Margin = Net operating income ÷ Sales

Question 17

Three years ago,one division of the Calsone Enterprise Company purchased depreciable assets costing $2,000,000.The cash flows from these assets for the past three years have been:
Calsone used the straight-line depreciation method;the estimated useful life is 10-years with no salvage value.For return on investment (ROI)calculations,Calsone uses end-of-year balances.$$\begin{array} { | l | r | } 
\hline \text { Year } & \text { Cash Flows } \
\hline 1 & \$ 600,000 \
\hline 2 & 700,000 \
\hline 3 & 810,000 \
\hline
\end{array}$$Required:
a.What was the ROI for each year using historical cost and gross book value?
b.What was the ROI for each year using historical cost and net book value?

Accepted Answer

Depreciation: $2,000,000/10 = $200,000/y

Question 18

Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that:

Accepted Answer

A)  residual income can be computed without regard to identifying an investment base. 
B)  appropriate goal congruence behavior is more likely to occur when using residual income. 
C)  residual income is well accepted in many organizations and often used in the financial press. 
D)  ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage. 
A)  residual income can be computed without regard to identifying an investment base. 
B)  appropriate goal congruence behavior is more likely to occur when using residual income. 
C)  residual income is well accepted in many organizations and often used in the financial press. 
D)  ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.

Question 19

A firm earning a profit can increase its return on investment by: (CMA adapted)

Accepted Answer

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. 
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.

Question 20

The measure (ratio)that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the:

Accepted Answer

A)  gross margin ratio. 
B)  profit margin ratio. 
C)  operating margin ratio. 
D)  contribution margin ratio. 
A)  gross margin ratio. 
B)  profit margin ratio. 
C)  operating margin ratio. 
D)  contribution margin ratio.

In general,a division's investment base includes an allocated share of the corporate headquarters' assets.

How does EVA differ from residual income?

Which of the following is not an advantage of after-tax income as a performance measure?

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

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

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

Sales and average operating assets for Wyeth Company and Genesis Company are given below: Sales Average Operating Assets Wyeth Company \ 20,000 \ 8,000 Genesis Company \ 50,000 \ 10,000 What is the margin that each company will have to earn in order to generate a return on investment of 20%?

Which of the following will not result in an increase in the residual income,assuming other factors remain constant?

Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that:

A firm earning a profit can increase its return on investment by: (CMA adapted)

The measure (ratio)that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the:

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

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Exam 14: Business Unit Performance Measurement

In general,a division's investment base includes an allocated share of the corporate headquarters' assets.

How does EVA differ from residual income?

Which of the following is not an advantage of after-tax income as a performance measure?

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

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

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

Sales and average operating assets for Wyeth Company and Genesis Company are given below: Sales Average Operating Assets Wyeth Company \ 20,000 \ 8,000 Genesis Company \ 50,000 \ 10,000 What is the margin that each company will have to earn in order to generate a return on investment of 20%?

Which of the following will not result in an increase in the residual income,assuming other factors remain constant?

Managerial performance can be measured in many different ways including return on investment (ROI)and residual income.A good reason for using residual income instead of ROI is that:

A firm earning a profit can increase its return on investment by: (CMA adapted)

The measure (ratio)that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the:

Cost Accounting: Information for Decision Making

Fundamentals of Cost-Volume-Profit Analysis

Fundamentals of Cost Analysis for Decision Making

Cost Estimation

Fundamentals of Product and Service Costing

Job Costing

Process Costing

Activity-Based Costing

Fundamentals of Cost Management

Service Department and Joint Cost Allocation

Fundamentals of Management Control Systems

Planning and Budgeting

Transfer Pricing

Fundamentals of Variance Analysis

Additional Topics in Variance Analysis

Performance Measurement to Support Business Strategy

Filters