1-20 Answers

1.    Which of the following income statement formats is most commonly used with flexible budgeting? (Points : 2)
Sales – manufacturing costs – selling and administrative costs = net income
Sales – cost of goods sold = gross margin – operating expenses = net income
Sales – variable costs = contribution margin – fixed costs = net income
None of the above

2.    Summer Company’s static budget is based on a planned activity level of 25,000 units. Later, the company’s management accountant prepared a budget based on 30,000 units. The company actually produced and sold 29,000 units. In evaluating its performance, management should compare the company’s actual revenues and costs to which of the following budgets? (Points : 2)
A budget based on 29,000 units.
A budget based on 30,000 units.
A budget based on 25,000 units.
Either A or C.

3.    Select the correct statement concerning the human factor of performance evaluation. (Points : 2)
Variances should not be used to single out managers for punishment.
Variances must be analyzed carefully to ensure that they are fully understood.
Just because a cost variance is labeled as favorable doesn’t necessarily mean that the manager should be commended for a job well done.
All of the above.
4.    A difference between the static budget based on planned volume and a flexible budget prepared at actual volume is called a: (Points : 2)
flexible budget variance.
volume variance.
production activity variance.
static budget variance.

5.    A budget prepared at a single volume of activity is referred to as a: (Points : 2)
strategic budget.
static budget.
standard budget.
flexible budget.

6.    Volume variances are computed for which of the following costs? (Points : 2)
Variable manufacturing costs only
Fixed manufacturing costs only
Variable selling and administrative costs only
Variable manufacturing and selling and administrative costs

7.    The research and development department of a large manufacturing company would likely be organized as a(n): (Points : 2)
cost center.
profit center.
revenue center.
investment center.

8. The following static budget is provided:
20,000 units
$ 200,000
Less variable costs:
Manufacturing costs
$ 70,000
Selling and administrative costs
$ 40,000
Contribution Margin
$ 90,000
Less fixed costs:
Manufacturing costs
$ 22,000
Selling and administrative costs
$ 17,000
Net Income
$ 51,000
What will be the budgeted net income if 18,000 units are produced and sold? (Points : 2)

9.    When using residual income (RI) as a project-screening tool, management should accept a project if: (Points : 2)
RI is negative.
RI is positive.
RI equals return on investment.
none of the above.

10.    Bilbo Company evaluates its managers on the basis of return on investment (ROI). Division Three has an ROI of 15% while the company as a whole has an ROI of only 10%. Which of the following performance measures will motivate the managers of Division Three to accept a project earning a 12% return? (Points : 2)
Return on investment (ROI)
Residual income (RI) Both ROI and RI will motivate the manager to accept the project
Neither ROI nor RI will motivate the manager to accept the project

11.    Which of the following would increase residual income? (Points : 2)
Decrease in operating income
Decrease in operating assets
Increase in the required ROI
Decrease in margin

12. Britannia Company has two investment opportunities. A cash flow schedule for the investments is provided below:
Investment A
Investment B
Which of the following techniques would be most appropriate for choosing between Investment A and Investment B? (Points : 2)
Payback technique
Present value index
Net present value technique
None of the above
12.    Tawanna is considering starting a small business. She plans to purchase equipment costing $145,000. Rent on the building used by the business will be $24,000 per year while other operating costs will total $30,000 per year. A market research specialist estimates that Tawanna’s annual sales from the business will amount to $90,000. Tawanna plans to operate the business for 6 years. Disregarding the effects of taxes, what will be the amount of annual net cash flow generated by the business? (Points : 2)
None of the above

14. Barney’s Bagels invested in a new oven for $12,000. The oven reduced the amount of time for baking which increased production and sales for five years by the following amounts of cash inflows:
Year 1
Year 2
Year 3
Year 4
Year 5
Using the averaging method, the payback period for the investment in the oven would be: (Points : 2)
5.0 years.
2.4 years.
2.0 years.
1.7 years.

15. Which of the following computer applications would be most useful for capital investment analysis? (Points : 2)
Word processing
Web browser
Presentation software

16. Henderson Company has two investment opportunities. Both investments cost $5,000 and will provide the same total future cash inflows. The cash receipt schedule for each investment is given below: Investment I
Investment II
Period 1
Period 2
Period 3
Period 4
The net present value of Investment II assuming a 10% minimum rate of return would be which of the following amounts? (round to nearest whole dollar) (Points : 2)

17. Select the incorrect statement concerning the internal rate of return (IRR) method of evaluating capital projects. (Points : 2)
The higher the IRR the better.
A project whose IRR is less than the cost of capital should be rejected.
If a project has a positive net present value then its IRR will exceed the hurdle rate.
The internal rate of return is that rate that makes the present value of the initial outlay equal to zero.

18. The purposes of the postaudit for capital investments include all of the following except: (Points : 2) continuous improvement.
punishment for poor capital investment decisions.
determining whether the project generated the results expected.
ensuring that managers closely scrutinize capital investment decisions.

19. An investment that costs $30,000 will produce annual cash flows of $10,000 for a period of 4 years. Given a desired rate of return of 8%, the investment will generate a: (Points : 2)
positive net present value of $33,121.
positive net present value of $3,121.
negative net present value of $33,121.
negative net present value of $3,121.

20. What amount of cash must be invested today in order to have $30,000 at the end of one year assuming the rate of return is 9%? (Points : 2)

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