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1
The manager of an investment center is responsible not only for the profit of the investment center, but also for the capital invested to earn that profit.
A)True
B)False
2
The price at which products or services are transferred between two subunits within an organization is called inter-transfer price.
A)True
B)False
3
Goal congruence is obtained when managers throughout an organization strive to achieve the goals set by top management.
A)True
B)False
4
A management approach where managers at all levels participate in setting goals, which they then will strive to achieve, is called management by objectives.
A)True
B)False
5
Obtaining goal congruence is inconsistent with the broad managerial approach known as management by objectives (MBO).
A)True
B)False
6
Return on Investment = Income/Invested Capital.
A)True
B)False
7
Return on investment (ROI) for an investment center can be determined by dividing net income of the investment center by total invested capital of the investment center.
A)True
B)False
8
Capital Turnover = Sales revenue/Invested capital.
A)True
B)False
9
Sales margin is equal to income divided by sales revenue.
A)True
B)False
10
Return on investment (ROI) can be expressed as: Sales margin x Capital turnover.
A)True
B)False
11
If sales margin improves from 3% to 5% and the capital turnover remains at 4, the new return on investment will be 8%, or 2% x 4.
A)True
B)False
12
If capital turnover improves from 4 times to 5 times and the sales margin remaines at 6%, the new return on investment will be 30%.
A)True
B)False
13
To improve the return on investment (ROI) for an investment center, a manager must increase sales and profits while maintaining the same level of invested capital, or increase invested capital while maintaining the same level of sales and profits.
A)True
B)False
14
One major drawback to using return on investment (ROI) as a measurement of management performance is that a manager may be reluctant to make additional capital investments even when the capital investment may generate profits in excess of the firm's cost of capital.
A)True
B)False
15
Profit minus an imputed interest charge, which is equal to the invested capital multiplied by an imputed interest rate, is called residual income.
A)True
B)False
16
Residual income is an amount in excess of the break-even point of the firm.
A)True
B)False
17
Residual income is a good measurement for comparing performance between different-size investment centers.
A)True
B)False
18
In computing the residual income, the factor called imputed interest rate refers to the current market rate of interest on investments of similar risk.
A)True
B)False
19
Shareholder value analysis calculates the residual income for a major product line.
A)True
B)False
20
Using residual income as an investment-center performance measure facilitates goal congruence, but using return on investment (ROI) does not.
A)True
B)False
21
A contemporary measure of investment center performance is economic value added (EVA).
A)True
B)False
22
Economic value added (EVA) differs from residual income since the EVA subtracts the investment center's current liabilities.
A)True
B)False
23
The weighted-average cost of capital is defined as: [(After-tax cost of debt capital x Market value of debt) + (Cost of equity capital x Market value of equity)] / (Market value of debt + Market value of equity).
A)True
B)False
24
The weighted-average cost of capital is .088.
A)True
B)False
25
The method of depreciation chosen to be applied to capital assets will have no effect on ROI when gross book value is used to measure invested capital.
A)True
B)False
26
Using total assets in making ROI, residual-income, and EVA calculations is appropriate when the division manager has considerable authority in making decisions about all of the division's assets, including nonproductive assets.
A)True
B)False
27
One advantage of using net assets as a measure of invested capital is that net book value maintains consistency with the balance sheet prepared for external reporting purposes.
A)True
B)False
28
One of the advantages of using net assets as a measure of invested capital is that it provides a more accurate measure of ROI, residual income, and EVA across time.
A)True
B)False
29
Since using net book value will produce a misleading increase in ROI over time, this phenomenon can produce serious effects on the incentives of investment center managers.
A)True
B)False
30
The key to choosing a measure of investment-center income is controllability.
A)True
B)False
31
The profit margin controlled by investment center managers, rather than an investment center's profit, can be used when computing the ROI or residual income as a method of measuring the performance of the investment center's manager, rather than the performance of the investment center.
A)True
B)False
32
A one-time cash payment to an investment center manager as a reward for meeting predetermined criterion on a specified performance measure is called a cash bonus.
A)True
B)False
33
A postaudit involves an evaluation of an investment center's investment decisions.
A)True
B)False
34
Measurements of investment center performance are focused solely on financial data.
A)True
B)False
35
The amount charged when one division sells goods or services to another division is called the transfer price.
A)True
B)False
36
A general rule for determining a transfer price that will ensure goal congruence is:"Additional outlay cost per unit incurred because goods are transferred + Opportunity cost per unit to the organization because of the transfer."
A)True
B)False
37
The transfer prices of products or services of a selling subunit that are offered to a buying subunit can create goal incongruence within a firm.
A)True
B)False
38
Opportunity costs exist in the determination of a transfer price when the selling subunit has no excess capacity to produce its products or services.
A)True
B)False
39
Excess capacity exists only when more goods can be produced than the producer is able to sell, due to low demand for a product or products.
A)True
B)False
40
Using the general transfer-pricing rule, and assuming no excess capacity, the transfer price is $10.00.
A)True
B)False
41
When there is excess capacity, the opportunity costs are zero in the general rule for determining the transfer price.
A)True
B)False
42
Using the general transfer-pricing rule, and assuming there is excess capacity, the transfer price is $8.35.
A)True
B)False
43
Assuming there is excess capacity, the company should accept a special-offer price of $9.00.
A)True
B)False
44
Implementing the general rule for determining a transfer price is relatively easy to implement because opportunity costs are easily measured.
A)True
B)False
45
The condition in which a single producer or group of producers can affect the market price is called perfect competition.
A)True
B)False
46
If the producing division has excess capacity or the external market is imperfectly competitive (a single producer or group of producers can affect the market price), the general transfer-pricing rule and the external market will yield the same transfer price.
A)True
B)False
47
When the transfer price is set at the market price, the producing division should have to option of either producing goods for internal transfer or selling in the external market.
A)True
B)False
48
Basing transfer prices on low distress market prices is always in the best interests of the company.
A)True
B)False
49
When no external market exists for a product, a negotiated transfer price may be used.
A)True
B)False
50
Setting the transfer price at the variable cost of the product will provide an incentive for the producing division to produce and transfer the product, especially when the producing department has excess capacity.
A)True
B)False
51
Another term for full cost is absorption cost.
A)True
B)False
52
Using a full-cost approach to setting transfer prices will cause fixed costs of the selling subunit to become variable costs of the buying subunit.
A)True
B)False
53
Transfer prices should not be based on full cost.
A)True
B)False
54
A buying division would prefer the use of standard prices over actual prices for determining the transfer price of a product it receives from a producing division.
A)True
B)False
55
The two issues that arise for multinational firms setting transfer prices between divisions in different countries are income-tax rated and import duties.
A)True
B)False
56
A system that ensures that an organization's employees act in a legal, ethical, and responsible manner is called an internal control system.
A)True
B)False
57
Transfer prices are seldom used in the service industry.
A)True
B)False
58
Financial performance measures provide incentives for managers to act in the best interest of the organization as a whole, but they also impose risk on a manager.
A)True
B)False
59
Activities such as bribery, deceit, illegal campaign contributions, and kickback constitute fraud.
A)True
B)False
60
Theft or misuse of an organization's resources constitutes fraud.
A)True
B)False
61
Intentionally misstating an organization's financial records constitutes corruption.
A)True
B)False





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