Multiple Choice Part 1 Chap 19

MULTIPLE CHOICE
1. Variance analysis would be appropriate to measure performance in

a. profit centers.
b. investment centers.
c. cost centers.
d. all of the above.
ANS: D DIF: Easy OBJ: 19-4
2. Which of the following responsibility centers may be evaluated on the basis of residual income?
a. investment center
b. revenue center
c. profit center
d. cost center
ANS: A DIF: Easy OBJ: 19-4
3. Net cash flow could be used to measure performance in

a. cost centers and investment centers.
b. revenue centers and profit centers.
c. revenue centers and investment centers.
d. profit and investment centers.
4. Using a single performance evaluation criterion for an investment center

a. is most effective because a manager can concentrate on a single goal.
b. can result in manipulation of the performance measure.
c. allows multinational investment centers' performances to be equitably compared.
d. is only appropriate if the criterion is non-monetary.
ANS: B DIF: Easy OBJ: 19-3,19-7
5. A company has set a target rate of return of 16% for its investment center. An investment center manager
in this company would
a. acquire assets that would increase divisional income by more than 16%.
b. sell all assets that do not generate divisional income of more than 16%.
c. acquire assets that would increase sales by more than 16%.
d. acquire any technologically advanced assets that would cause costs to be reduced by 16%
or more.
6. In evaluating the performance of a profit center manager, the manager

a. and the sub-unit should be evaluated on the basis of the same costs and revenues.
b. should only be evaluated on the basis of variable costs and revenues of the sub-unit.
c. should be evaluated on all costs and revenues that are controllable by the manager
d. should be evaluated on all costs and revenues that can be directly traced to the sub-unit.
ANS: C DIF: Easy OBJ: 19-4
7. The Statement of Cash Flows may be superior to the cash budget as a performance evaluation measure
because
a. cash flows are shown on the accrual basis on the cash budget.
b. the cash budget does not include capital investments.
c. cash flows are arranged by activity.
d. of all the above reasons.
ANS: C DIF: Moderate OBJ: 19-4
8. The Statement of Cash Flows indicates the cash inflows and outflows from
a. investing, financing, and borrowing activities.
b. operating, investing, and sending activities.
c. merchandising, financing, and investing activities.
d. operating, investing, and financing activities.
9. Division A's investment in a new project will raise the overall organization's return on investment if
a. the return on investment on the new project exceeds the target return of the overall
organization.
b. the return on investment on the new project exceeds the return on investment of Division
A.
c. the return on investment on the new project exceeds the overall organization's return on
investment.
d. Division A's return on investment exceeds the return on investment of the overall
organization.
10. If sales and expenses both rise by $100,000

a. residual income will increase.
b. return on investment will increase.
c. return on investment will be unchanged.
d. asset turnover will decrease
11. ABC Corp. is composed of three operating divisions. Overall, the ABC Corp. has a return on investment
of 20%. A Division has a return on investment of 25%. If ABC Corp. evaluates its managers on the basis
of return on investment, how would the A Division manager and the ABC Corp. president react to a new
investment that has an estimated return on investment of 23%?
A Division manager ABC Corp. president
a. accept accept
b. accept reject
c. reject accept
d. reject reject
12. A company's return on investment is affected by a change in
Profit Margin
Asset Turnover on Sales
a. Yes Yes
b. Yes No
c. No No
d. No Yes
13. The return on investment (ROI) ratio measures

a. only asset turnover.
b. only earnings as a percent of sales.
c. both asset turnover and earnings as a percent of sales.
d. asset turnover and earnings as a percent of sales, correcting for the effects of differing
depreciation methods.
14. Return on investment (ROI) is a term most often used to express income earned on assets
invested in a business unit. A company's return on investment would increase if sales
a. increased by the same dollar amount as expenses and total assets increased.
b. remained the same and expenses were reduced by the same dollar amount that total assets
increased.
c. decreased by the same dollar amount that expenses increased.
d. and expenses increased by the same percentage that total assets increased.
ANS: B DIF: Moderate OBJ: 19-4
15. A sub-unit of an organization is evaluated on the basis of its ROI. If this sub-unit's sales and expenses
both increase by $30,000, how will the following measures be affected?
ROI Assert turnover Profit margin
a. increase increase increase

b. indeterminate increase decrease
c. no change increase decrease
d. no change decrease no change
16. Which of the following would be an appropriate alternative to the use of ROI in evaluating the
performance of an investment center?
Residual Net cash Cost and revenue

income flow variance analysis
a. yes yes yes

b. no yes no
c. yes no no
d. yes no yes
17. Return on investment is computed by dividing income by

a. contribution margin.
b. inventory turnover.
c. assets invested.
d. average assets employed.
18. Presently, the Classic Book Division of Griffin Publishing Corporation has a profit margin of 30%. If
total sales rise by $100,000, the net result will be
a. an increase in the profit margin ratio to above 30%.
b. a decrease in the profit margin ratio to below 30%.
c. no change in the profit margin ratio.
d. a change in the profit margin ratio that cannot be determined from this information.
19. Profit margin indicates the portion of sales that

a. covers fixed expenses.
b. is not used to cover expenses.
c. equals contribution margin.
d. equals product contribution margin.
ANS: B DIF: Easy OBJ: 19-4
20. Profit margin equals

a. income divided by sales.
b. incomes divided by average inventory.
c. income divided by average assets.
d. income divided by average stockholder's equity.
21. The Du Pont model measures

a. residual income.
b. return on investment.
c. throughput.
d. profit.
22. In the Du Pont model, profit margin is a ratio of

a. income to sales.
b. income to assets.
c. sales to income.
d. sales to assets.
23. The Du Pont model measures ROI as it is affected by

a. contribution margin and asset turnover.
b. profit margin and asset turnover.
c. asset turnover.
d. profit margin.
24. Residual income is used as a performance measure in
a. profit centers.
b. cost centers.
c. investment centers.
d. revenue centers.
25. If a new project generates a positive residual income, the

a. project's return on investment is less than the target rate.
b. project's return on investment is greater than the target rate.
c. project's return on investment is equal to the target rate.
d. relationship between the project's return on investment and the target rate cannot
necessarily be determined.

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MULTIPLE CHOICE

1. Variance analysis would be appropriate to measure performance in

3. Net cash flow could be used to measure performance in

4. Using a single performance evaluation criterion for an investment center

6. In evaluating the performance of a profit center manager, the manager

10. If sales and expenses both rise by $100,000

A Division manager ABC Corp. president

12. A company's return on investment is affected by a change in

ANS: A DIF: Easy OBJ: 19-4

13. The return on investment (ROI) ratio measures

ROI Assert turnover Profit margin

a. increase increase increase

Residual Net cash Cost and revenue

a. yes yes yes

ANS: C DIF: Easy OBJ: 19-4

17. Return on investment is computed by dividing income by

19. Profit margin indicates the portion of sales that

20. Profit margin equals

21. The Du Pont model measures

22. In the Du Pont model, profit margin is a ratio of

23. The Du Pont model measures ROI as it is affected by

25. If a new project generates a positive residual income, the

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