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Accounting Chapter 16
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Terms in this set (53)
The method of evaluating financial data that change under different courses of action is called:
Financial statement analysis
Break-even analysis
Incremental analysis
Cost-benefit analysis
Incremental analysis
Braizen, Inc. produces a product with a $30 per-unit variable cost and an $80 per-unit sales price. Fixed manufacturing overhead costs are $100,000. The firm has a one-time opportunity to sell an additional 1,000 units at $60 each that would not affect its current sales. Assuming the company has sufficient capacity to produce the additional units, how would the acceptance of the special order affect net income?
Income would decrease by $30,000.
Income would increase by $30,000.
Income would increase by $140,000.
Income would increase by $40,000.
Income would increase by $30,000.
Opportunity costs are:
Included in inventory
Foregone benefits
Sunk costs
Included in cost of goods sold
Foregone benefits
A sunk cost is a cost that:
Has been incurred and cannot be eliminated
Is never relevant in decision-making
Is never a differential cost
All of these
All of these
_____________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product's selling price:
Relevant costing
Product costing
Differential costing
Target costing
Target costing
______________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another:
Target cost
Sunk cost
Opportunity cost
Allocated cost
Opportunity cost
_____________ costs between two alternative projects are those that would result from selecting one alternative instead of the other:
Allocated
Differential
Sunk
Irrelevant
Differential
Which of the following cost classifications would not be considered relevant in comparing decision alternatives?
Opportunity cost
Differential cost
Sunk cost
None of these
Sunk cost
In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?
Direct labor
Direct materials
Variable manufacturing overhead
Fixed manufacturing overhead that cannot be avoided
Fixed manufacturing overhead that cannot be avoided
A cost classified "for decision-making purposes" would include:
Period cost
Opportunity cost
Controllable cost
Inventoriable cost
Opportunity cost
Relevant costs in decision-making:
Are future costs that represent differences between decision alternatives
Result from past decisions
Should not influence the decision
None of these
Are future costs that represent differences between decision alternatives
A cost is considered relevant if:
It is positive
It is sunk
It makes a difference
It can't be changed
It can't be changed
If a cost is irrelevant to a decision, the cost could not be a:
Fixed cost
Sunk cost
Differential cost
Variable cost
Differential cost
The potential rental value of space used in the manufacturing process:
Is a variable production cost
Is an unavoidable production cost
Is a sunk production cost
Is an opportunity cost if production is not outsourced
Is an opportunity cost if production is not outsourced
Greenland Sports, Inc. has been asked to submit a bid to the National Hockey League on supplying 1,000 pairs of professional quality skates. The cost per pair of skates has been determined as follows:
Direct materials 80
Direct labor 60
Variable overhead 30
Fixed overhead (allocated) 20
Other non-manufacturing costs associated with each pair of skates are:
Variable selling cost (commission) 25
Fixed selling and admin cost 10
Assume the commission on the sale of skates to the National Hockey League would be reduced to $15 per pair and that available production capacity exists to produce the 1,000 pairs of skates, the lowest price the firm can bid is some price greater than:
185
190
215
225
185
The key to analyzing a sell as is or process further decision is to determine that:
Opportunity costs exceed sunk costs
Incremental revenues exceed incremental costs
Differential costs do not exist
All allocated costs are included in the decision
Incremental revenues exceed incremental costs
In a make or buy decision, which of the following costs would be considered relevant?
Avoidable costs
Unavoidable costs
Sunk costs
Allocated costs
Avoidable costs
Which of the following qualitative factors favors the buy option in the make or buy decision?
Production scheduling
Utilization of idle capacity
Ability to control quality
Technical expertise of supplier
Technical expertise of supplier
Product Z sells for $18 per unit as is, but if enhanced it can be sold for $24 per unit. The enhancement process will cost $50,000 for 10,000 units. If the 10,000 units of Product Z are sold as is without further processing, the company will incur:
An incremental profit of $10,000
An opportunity cost of $10,000
An incremental profit of $1 per unit
An incremental loss of $6 per unit
An opportunity cost of $10,000
A(n) _____________ is the minimum cost that can be incurred, which when subtracted from the selling price, allows for a desired profit to be earned.
Relevant cost
Opportunity cost
Incremental cost
Target cost
Target cost
Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines. In order to compete in this market, the target cost for Product X must be equal to or lower than:
28
45
52
80
52
Which of the following costs are not relevant in a decision to continue or discontinue a segment of the organization?
Avoidable
Unavoidable
Opportunity
Differential
Unavoidable costs
The decision to continue or discontinue a segment of the business should focus on:
Sales minus total variable expenses and total fixed expenses
Sales minus total variable expenses and avoidable fixed expenses of the segment
Sales minus total variable expenses and allocated fixed expenses of the business
None of these
Sales minus total variable expenses and avoidable fixed expenses of the segment
The decision for solving production mix problems involving multiple products and scarce production resources should focus on:
Gross profit of each product
Sales price of each product
Contribution margin per unit of scarce resource
Contribution margin of each product
Contribution margin per unit of scarce resource
XYZ Company produces three products: A, B, and C. Product A has a contribution margin of $20 and requires 1 hour of machine time. Product B has a contribution margin of $30 and requires 2 hours of machine time. Product C has a contribution margin of $36 and requires 1.5 hours of machine time. If machine hours are considered scarce, in what product mix order should XYZ Company schedule the production of Products A, B, and C for the available machine hours?
ABC
CAB
CBA
BCA
CAB
A principal difference between operational budgeting and capital budgeting is the time frame of the budget. Because of this difference, capital budgeting:
Is an activity that involves only the financial staff
Is done on a rolling budget period basis
Focuses on the present value of cash flows from investments
Is concerned with a long-term net income forecast
Focuses on the present value of cash flows from investments
Capital budgeting differs from operational budgeting because:
Depreciation calculations are required
It considers the time value of money
Operating expenses are not relevant
Capital budgets don't affect cash flow
It considers the time value of money
Capital expenditure analysis, which leads to the capital budget, attempts to determine the impact of a proposed capital expenditure on the organization's:
Segment margin
Contribution margin
ROI
Cost of capital
ROI
The cost of capital used in the capital budgeting analytical process is primarily a function of:
ROE
ROI
The cost of acquiring the funds that will be invested
The discount rate
The cost of acquiring the funds that will be invested
For most firms, the cost of capital is probably in the range of:
The prime rate, plus or minus 2%
Less than 10%
Between 10 and 20%
More than 20%
Between 10 and 20%
When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:
The quantitative analysis indicates that it should not be made
Management's assessment of qualitative factors overrides the quantitative analysis
The timing of the cash flows of the investment will not be as assumed in the present value calculation
Post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized
Management's assessment of qualitative factors overrides the quantitative analysis
Which of the following is not an important qualitative factor to consider in the capital budgeting decision?
Regulations that mandate investment to meet safety, environmental, or access requirements
Technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time
Commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others
All of these are important qualitative factors to consider
All of these are important qualitative factors to consider
Which of the following is typically not important when calculating the net present value of a project?
Timing of cash flows from the project
Income tax effect of cash flows from the project
Method of financing the project
Amount of cash flows from the project
Method of financing the project
Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?
Initial investment
Income taxes
Salvage value
Working capital
Income taxes
In order to calculate the net present value of a proposed investment, it is necessary to know:
The cash flows expected from the investment
The net income expected from the investment
The interest rate paid on funds borrowed to make the investment
The cash dividends paid on the stock each year
The cash flows expected from the investment
Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:
7% rate
8% rate
9% rate
all of these
9% rate
If a project promises to generate a higher rate of return than the firm's cost of capital, accepting the project will:
Increase ROI
Decrease ROI
Increase payback
Decrease payback
Increase ROI
If the net present value of the investment is $8,510, then:
The rate of return is less than the cost of capital
The present value of cash flows are more than the investment
The cost of capital is higher than the internal rate of return
The present value of the cash flows is 8,510 less than the investment
The present value of cash flows are more than the investment
If the net present value of a proposed investment is positive:
The investment will not be made
The cost of capital is higher than the internal rate of return
The cost of capital is positive
The cost of capital is lower than the internal rate of return
The cost of capital is lower than the internal rate of return
The present value ratio of a proposed investment will be:
Less than 1.0 if the net present value is positive
Negative if the proposed investment meets the cost of capital target
Less than 1.0 if the net present value is negative
Greater than 1.0 if the cost of capital exceeds the internal rate of return
Less than 1.0 if the net present value is negative
The principal weakness of the payback method for evaluating proposed investments is that it does not:
Provide a way of ranking projects in order of desirability
Consider cash flows that continue after the investment has been recovered
Result in an easily understood "answer"
Recognize the time value of money
Recognize the time value of money
The accounting rate of return method for evaluating proposed investments:
Is based on cash receipts and disbursements related to the investment
Uses accounting net income from the operating budget
Does not recognize the time value of money
Is easier to use than the net present value method
Does not recognize the time value of money
The capital budgeting analytical technique that calculates the rate of return on the investment based on the impact of the investment on the financial statements is known as the:
Internal rate of return
Accounting rate of return
Payback period
Net present value
Accounting rate of return
An advantage of the net present value method for evaluating investment proposals over the internal rate of return method is that:
Only one set of present value calculations using a required discount rate is made
The actual rate of return on the project is calculated
Projects can be ranked in order of profitability using the net present value amount
Estimates of future cash flows do not have to be made
Only one set of present value calculations using a required discount rate is made
If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is:
8 years
7 years
6 years
5 years
8 years
Which of the following statements are true regarding the payback period?
The time value of money is considered when calculating the payback
The payback analysis is more accurate than the net present value analysis
The payback period is less accurate than the net present value analysis
The time value of money is not considered when calculating the payback
The time value of money is not considered when calculating the payback
Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow:
Annual sales 88000
Labor costs (72000)
Depreciation of equipment (6000)
Operating income =10000
Income taxes (4000)
Net income =6000
The estimate payback of the investment in the pasta equipment is:
3 years
4 years
6 years
8 years
4 years
Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow:
Annual sales 88000
Labor costs (72000)
Depreciation of equipment (6000)
Operating income =10000
Income taxes (4000)
Net income =6000
The estimated accounting rate of return is:
12.5%
18.0%
25.0%
33.3
...
In a capital budgeting decision, if a firm uses the net present value method and a 12% discount rate, what does a negative net present value indicate?
The proposal's rate of return exceeds 12%
The proposal's rate of return is less than the minimum rate required
The proposal earns a rate of return between 10% and 12%
None of these
The proposal's rate of return is less than the minimum rate required
A capital budgeting decision method that considers the time value of money is the:
Accounting rate of return method
Return on stockholders' equity method
Cash payback method
Internal rate of return method
Internal rate of return method
Which of the following is a true statement regarding the internal rate of return in capital budgeting?
It provides the same basic information as the net present value method
It calculates the net present value of future cash flows
It calculates the proposal's rate of return
It doesn't consider the time value of money
It calculates the proposal's rate of return
Which of the following is a true statement regarding the net present value method in capital budgeting?
It provides the same basic information as the accounting rate of return
It calculates the present value of future cash flows
It calculates the proposal's rate of return
It doesn't consider the time value of money
It calculates the present value of future cash flows
Sometimes when management decisions are reached, the investment project with the highest NPV or IRR is not selected. This occurs because:
A lower IRR is a less risky investment
The highest NPV is not necessarily the highest IRR
Qualitative factors override quantitative analysis techniques
Sometimes management makes the wrong decision
Qualitative factors override quantitative analysis techniques
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