CHAPTER 12 FINANCIAL CONTROL TRUE/FALSE 1. Financial control involves the use of financial measures to assess organizational and management performance. a. True b. False 2. Financial measures identify what is wrong with an organization, not simply provide a signal that something needs attention. a. True b. False 3. Financial measures can highlight falling sales and profits in an organization, but only nonfinancial measures can identify why this is occurring. a. True b. False 4. Properly chosen nonfinancial measures anticipate and help to explain financial results in an organization. . True b. False 5. In a centralized organization, front-line employees are trained to respond to changes in the business environment. a. True b. False 6. The amount of decentralization in an organization reflects the organization’s trust in its employees and other factors. a. True b. False 7. When an organization moves to decentralized decision making, control moves from results control to task control. a. True b. False 8. For an organization to be successful, activities within sales, manufacturing, and customer service need to be coordinated. . True b. False 9. Organizations use nonfinancial control to provide a summary measure of how well their systems of operations control are working. a. True b. False 10. Properly chosen nonfinancial measures anticipate and explain financial results. a. True b. False 11. A support department, such as human resources, should be evaluated as a revenue center. a. True b. False 12. A major problem faced by cost centers is assigning jointly earned revenues. a. True b. False 13. A profit center is like an independent business. a. True b. False 14.
The performance measures chosen should influence the employees’ decision-making behavior. a. True b. False 15. For the segment manager to be properly evaluated, common costs should be allocated to the various segments, even if an arbitrary allocation is required. a. True b. False 16. Contribution margin is the best measure of the controllable contribution of a profit center toward organizational profit. a. True b. False 17. If a product line was eliminated, forecasted annual corporate profits in the short run would decrease by the amount of that product line’s net income. . True b. False 18. In general, managers are motivated to influence generated revenues when those revenues are included in their performance measures. a. True b. False 19. Conventional segment margin income statements clearly capture the interactive effects among responsibility centers. a. True b. False 20. A major goal of transfer pricing is to motivate the decision maker to act in the organization’s best interests. a. True b. False 21. Transfer prices based on actual costs provide no incentive to the supplying division to control costs. a. True b.
False 22. If external markets exist, then cost-based transfer prices are the most appropriate. a. True b. False 23. Negotiated transfer prices, and therefore production decisions, may reflect the negotiating skills of the parties rather than economic considerations. a. True b. False 24. Return on investment (ROI) encourages segment managers to reject all capital projects with returns greater than the company’s cost of capital. a. True b. False 25. The most widely accepted definition of productivity is the ratio of output over input. a. True b. False 26.
The financial measure, economic value added evaluates income relative to the level of investment required. a. True b. False 27. A sole ratio value is generally not very useful. a. True b. False 28. The net profit margin ratio for Wal-Mart, a discount store, is approximately 3%. This is low compared to Microsoft’s 20% net profit margin ratio, and therefore, indicates Wal-Mart is a poor investment. a. True b. False 29. In general, a discount retail store, such as K-mart, would be expected to have a greater inventory turnover ratio than an automotive retailer. a. True b. False 30.
In general, a debt ratio of 60% indicates lower financial risk than a debt ratio of 80%. a. True b. False MULTIPLE CHOICE 31. Measure of financial control highlight: a. falling profits b. poor quality c. high prices d. unsatisfactory service 32. All of the following are reasons that financial control may be an ineffective scorecard EXCEPT that: a. it fails to identify the causes or drivers of performance b. it focuses on financial measures while ignoring other important attributes of performance c. it focuses on long-term rather than short-term performance measures d. t is an aggregate, rather than a detailed measure of performance 33. Performance measures for financial control include all of the following EXCEPT: a. reduced cycle times b. ROI ( return on investment) and economic value added c. profit d. cost 34. Which of the following statements is FALSE regarding financial and nonfinancial measures of performance? a. Nonfinancial measures may help to anticipate and explain financial results. b. Financial measures include aggregate measures. c. Nonfinancial measures may help to identify the causes of financial results. . Financial measures are lead indicators of future success. 35. In a centralized organization: a. local-division managers have greater control over their business segments b. there are few deviations from the standardized way of doing things c. front-line employees are trained to respond to changes in the business environment d. decisions are made by the managers most familiar with the problems and opportunities 36. In a decentralized organization: a. local-division managers must receive higher approval for most business decisions b. ompany-wide standard operating procedures are common c. local-division managers have an opportunity to gain decision-making experience d. decisions are made by senior executives 37. A decentralized organization does all the following EXCEPT it: a. encourages local success rather than organizational success b. trains employees in skills needed for decision making c. assigns responsibility to front-line employees d. adapts to the local business environment 38. All of the following are true of responsibility centers EXCEPT that they: a. perate like a small business b. promote the interests of the larger organization c. coordinate activities with other responsibility centers d. are best used in a centralized organization 39. The MOST likely result of decentralization is to give local-division managers the responsibility for: a. evaluating strategic goals b. allocating joint costs c. operating decisions d. financial control 40. All of the following would likely be classified as cost centers except: a. Maintenance department at local grocery store. b. your university’s computer center . X-ray department of hospital d. All of the above are cost centers. 41. A local unit is evaluated as a profit center but the corporate office controls many facets of the operation. If local-unit performance is poor, it may reflect: a. poor corporate decisions b. poor local decisions c. conditions that no one can control d. All of the above are correct. 42. Measuring performance based on cost per unit will motivate performance that includes keeping __________ under control. a. only costs b. costs and on-time delivery c. costs and the amount of defects d. only quality 43.
A cost center is a business segment: a. that usually evaluates employee performance by comparing the center’s actual costs with target or standard costs for the amount and type of work done b. in which interperiod cost comparisons can be misleading if the output level and production mix are constant c. that usually includes individual stores within a department-store chain d. that should be evaluated solely on its ability to control and reduce costs 44. All of the following are true of a revenue center EXCEPT that it: a. controls service quality and units sold . controls the acquisition cost of the product or service sold c. may control price, product mix, and promotional activities d. may incur sales and marketing costs 45. When responsibility centers are treated as profit centers: a. the segment manager has responsibility for pricing and product selection, but not for purchasing and promotion b. the corporate office makes most of the operating and pricing decisions c. the information technology group of a manufacturing firm would typically be treated as a profit center d. here are usually problems associated with assigning jointly earned revenues 46. A fully-owned subsidiary of a multinational firm reports return on investment four times a year. This is an example of: a. a revenue center b. a cost center c. an investment center d. a profit center 47. Segment margin includes: a. all costs traceable to the segment b. the segment’s share of allocated corporate costs c. the segment’s share of allocated unavoidable costs d. All of the above are correct. 48. Managers of cost centers are responsible for: a. costs and investments. b. evenues and costs. c. costs, revenues, and investments. d. costs. 49. Segment margin is calculated as follows: a. Revenues less flexible costs. b. Revenues less expenses. c. Revenues less direct costs. d. Revenues less variable costs. 50. Caution should be taken when interpreting a segment margin income statement because: a. revenues may be based on transfer prices b. the interactive effects among responsibility centers are generally not clearly captured c. expenses may be a result of subjective allocation of jointly incurred costs d. All of the above are correct. 51.
Utilities might be allocated to individual cost centers: a. based on the square footage each cost center uses b. based on the number of employees utilized by each individual center c. only if the allocation serves some decision-making purpose d. never, because it is a non-cash cost that should not be allocated THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 52 THROUGH 55. The management accountant for the Ortega Organics has prepared the following segmented income statement for the most current year. ProduceFish & MeatSundriesTotal Sales$60,000$100,000$40,000$200,000
Variable expenses36,00065,00020,000121,000 Contribution margin24,00035,00020,00079,000 Other costs18,00021,000 8,00047,000 Segment margin6,00014,00012,00032,000 Allocated avoidable costs 2,000 3,000 3,0008,000 Segment income4,00011,0009,00024,000 Allocated corporate costs 7,000 7,000 7,00021,000 Corporate profit$(3,000)$ 4,000$ 2,000$ 3,000 52. If the Produce department had been eliminated prior to this year, the company would have reported: a. greater corporate profits b. the same amount of corporate profits c. less corporate profits d. resulting profits cannot be determined 53.
If the Fish & Meat department had been discontinued, the short-term effect on corporate profits would be a decrease of: a. $35,000 b. $14,000 c. $11,000 d. $4,000 54. Assume that the Sundries department has been discontinued and long-term capacity of the company has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of: a. $20,000 b. $12,000 c. $9,000 d. $2,000 55. Assume an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, the __________ department should receive the advertising dollars.
Assume the cost of the advertising campaign is less than the revenues it generates. a. Sundries b. Fish & Meat c. Produce d. From the information given, the correct product line cannot be determined. 56. If a company subscribes to the controllability principle, then it would be best to evaluate product line management on: a. contribution margin b. corporate profit c. segment income d. segment margin 57. The primary goal of transfer pricing is to: a. motivate the decision maker to act in the organization’s best interests b. obtain a high transfer price for the supplying unit c. btain a high transfer price for the receiving unit d. agree on a price for external sales 58. All of the following are true of market-based transfer prices EXCEPT that they: a. may lead to goods/services being purchased externally b. provide an independent valuation c. exist for all transferred products and services d. provide the proper economic incentives 59. All of the following are true of cost-based transfer prices EXCEPT that they: a. provide no incentive to the supplying division to control costs when actual costs are used b. ay use standard costs to help maintain operating efficiency c. promote the optimal level of transactions for the overall organization d. don’t give proper guidance when operating capacity is constrained 60. The MOST likely result of a negotiated transfer price is that it: a. takes away the ultimate responsibility of the resulting transfer price from the two parties b. may reflect the relative negotiating skills of the two parties c. generally results in transferring more than the optimum number of units d. reflects purely economic considerations 1. An administered transfer price: a. is most often used for infrequent transactions b. retains the accountability of both parties c. reflects pure economic considerations d. provides an arbitrary distribution of revenues and costs between the responsibility centers THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 62 THROUGH 65. The Jordan Company manufacturers only one type of shoe and has two divisions, the Sole Division and the Assembly Division. The Sole Division manufactures soles and then “sells” them to the Assembly Division, which completes the shoes and sells them to retailers.
The market price for the Assembly Division to purchase a pair of soles is $20. Fixed costs are per pair at 100,000 units. Sole’s costs per pair of soles are: Direct materials$4 Direct labor$3 Variable overhead$2 Division fixed costs$1 Assembly’s costs per completed pair of shoes are: Direct materials$5 Direct labor$1 Variable overhead$1 Division fixed costs$9 62. If the cost-based transfer price is 180% of variable costs , what is the transfer price per pair of soles from the Sole Division to the Assembly Division? a. $14. 40 b. $12. 60 c. $16. 20 d. $28. 80 63.
Calculate and compare the difference in overall corporate net income between Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for $60 per pair to customers. Scenario A: Negotiated transfer price of $15 per pair of soles Scenario B: Market-based transfer price a. $500,000 more net income under Scenario A b. $500,000 of net income using Scenario B c. $100,000 of net income using Scenario A d. None of the above is correct. 64. Assume the transfer price for a pair of soles is 180% of full costs of the Sole Division and 100,000 of soles are produced and transferred to the Assembly Division.
The Sole Division’s operating income is: a. $800,000 b. $900,000 c. $1,280,000 d. $1,800,000 65. If the Assembly Division sells 100,000 pairs of shoes at a price of $60 a pair to customers, what is the operating income of both divisions together? a. $4,400,000 b. $3,400,000 c. $3,000,000 d. indeterminable 66. Problems of using investment centers include all of the problems associated with profit centers plus all of the following EXCEPT: a. how to identify the assets used by each investment center b. how to assign the responsibility for jointly-used assets such as uildings c. how to determine the value of the assets used by each investment center d. what method to use to depreciate the assets 67. All of the following equations represent return on investment (ROI) EXCEPT: a. efficiency x productivity b. operating income / investment c. return on sales x inventory turnover d. (operating income / sales) x (sales / investment) 68. To discover where to make improvements in productivity, managers might do all of the following EXCEPT: a. calculate the ratio of output over input b. ompare return on sales to a competitor’s return on sales c. use trend analysis d. compare the asset turnover ratio for this accounting period to an industry norm 69. Return on investment (ROI) can be increased by: a. increasing sales b. decreasing operating assets c. decreasing operating income d. decreasing asset turnover 70. The MAJOR criticism of using return on investment (ROI) for financial control is that it: a. gives managers an incentive to reject projects with an ROI greater than the company’s required rate of return but less than the department’s current ROI b. sually uses the blended rate of capital as the required rate of return c. encourages competition among segment managers d. is a measure of overall performance 71. Assume an organization’s cost of capital is 8% and Department A currently has a 12% return on investment (ROI). The manager of Department A, who is evaluated on ROI, would MOST likely accept an investment that is expected to return: a. more than 8% b. more than 12% c. more than 8% but less than 12% d. less than 12% THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 72 THROUGH 74. Randall Company makes and distributes outdoor play equipment.
Last year sales were $2,400,000, operating income was $600,000, and the assets used were $3,000,000. 72. Return on sales, the efficiency component of return on investment (ROI), is: a. 20% b. 80% c. 25% d. 125% 73. Asset turnover, the productivity component of return on investment (ROI), is: a. 20% b. 80% c. 25% d. 125% 74. The return on investment (ROI) is: a. 20% b. 80% c. 25% d. 125% 75. Economic value added: a. encourages segment managers to accept only new capital projects with a return on investment (ROI) that exceed the current ROI b. f $50,000 indicates the segment earned $50,000 for the company c. of $10,000 indicates the segment’s actual earnings (adjusted for biasing effects of accounting conservatism) exceeded the company’s cost of capital by $10,000 d. is considered an inferior method of evaluating investment center performance 76. The text discusses how Quaker Oats used economic value added to evaluate the practice of trade loading, which is a practice of loading up the supply line with product to last several months. This application of economic value added would focus on: a. omparing the profit changes caused by trade loading with changes in customer satisfaction b. the effect on partners in the distribution channel caused by abandoning trade loading c. the difference in prices caused by trade loading d. comparing the benefits and costs of trade loading with the required investment in inventory 77. A measure of operations efficiency generally divides: a. output by input b. standard revenues by standard costs c. sales by cost of goods sold d. sales by investment 78. All of the following are true regarding productivity EXCEPT: a. hat an example of raw material productivity is the weight of the final product to the weight of the raw materials b. that the most widely accepted definition of productivity is the ratio of operating income over sales c. that an example of machine productivity is a machine’s output per hour d. machine productivity is an effective method of relating process results with financial results 79. Assume an organization’s cost of capital is 10% and Division X has operating income of $1. 5 million and uses $10 million of capital. The economic value added for Division X is: a. 100,000 b. $150,000 c. $500,000 d. $850,000 80. All of the following are true regarding common size statements EXCEPT that they: a. help to identify trends in a company’s balance sheet components over time b. allow a comparison of balance sheet components of similar organizations c. express balance sheet items as a percent of total assets d. express income statement amounts as a percent of net income 81. The text showed that Nortel’s sales fell over 40% between 2000 and 2001, but the cost of sales as a common-size percentage increased dramatically because: a. evenues were falling at a faster rate than Nortel could shed fixed costs b. assets acquired were purchased for more than book value c. intangible assets decreased due to the write-down or write-off of many bad investments d. common stockholders’ equity increased to reflect the financing of investments 82. Financial ratios derived from a company’s financial statements: a. need to be compared to other information, such as a company’s ratios from prior years, to be useful b. on their own, provide enough information for decision makers to make well-informed decisions c. ust use amounts from the same financial statement d. have a set formula so there is consistency in calculations and they can be easily compared to ratios of competitors 83. Which of the following statements is true regarding profitability ratios? a. The current ratio measures a company’s ability to meet short-term obligations – a profitability ratio. b. A return on assets of 15% indicates that for every dollar invested in assets, the company is generating 15 cents in net income. c. If the industry average for the net profit margin ratio was10%, then a company ratio of 5% would be considered favorable. d.
A decreasing trend for the return on common equity ratio is considered favorable. 84. Which of the following statements is true regarding asset use (productivity) ratios? a. The dividend payout ratio indicates the proportion of net income paid out in dividends – a productivity ratio. b. A total asset turnover of 2. 0 indicates that for every dollar invested in assets, the company is generating $2 in net income. c. If the industry average for the inventory turnover ratio is 4 times, then a company’s inventory turnover ratio of 6 times indicates a company is turning over inventory faster than the industry average.
This would be considered favorable. d. A decreasing trend for accounts receivable turnover indicates receivables are being collected in fewer days and is considered favorable. 85. Which of the following statements is true regarding liquidity ratios? a. The debt ratio measures the proportion of assets financed by debt – a liquidity ratio. b. The current ratio measures the ability to meet all debt obligations – both short term and long term. c. A decreasing trend for free cash flow indicates a strong cash position and a better ability to meet current obligations. d.
The times-interest-earned ratio may not be a good indicator of the organization’s ability to pay interest since interest is paid with cash and not income. 86. Which of the following statements is true regarding financial leverage ratios? a. Return on common equity is a solvency ratio. b. A 1. 5 debt-to-equity ratio indicates a greater proportion of a company’s assets are being financed with equity rather than with debt. c. If the industry average for the debt ratio is 60%, then a company’s ratio of 90% indicates the proportion of total assets financed by debt is greater than the average for the industry. . A decreasing trend for the debt-to-equity ratio indicates greater financial risk. 87. Using the information below, return on common equity equals: |BALANCE SHEET |December 31, 2007 | |Accounts payable |$10,000 | |Bonds payable |$50,000 | |Common stock |$15,000 | Retained earnings |$25,000 | |INCOME STATEMENT |For the year ended December 31, 2007 | |Net income |$10,000 | a. 10% b. 25% c. 11% d. 67% 88. Use the information below to select the correct response: Cash |$ 20,000 | |Accounts receivable |$ 30,000 | |Inventory |$ 50,000 | |Equipment, net |$300,000 | |Accounts payable |$ 40,000 | |Bonds payable (long-term) |$ 160,000 | |Common stock |$ 60,000 | |Retained earnings |$ 140,000 | a. The quick ratio equals 0. 25. b. The current ratio equals 0. 10. c. The debt ratio equals 20%. d. The debt-to-equity ratio equals 100%. 89. Two companies are identical except for the fact that Company D uses the double-declining-balance method of depreciation and Company S uses the straight-line method of depreciation. Assume this is the first year of business for both companies. For Company D, the ratio that will be greater is: a. the current ratio b. the net profit margin ratio c. he total asset turnover ratio d. the dividend yield ratio 90. Acton Company and Baxter Company are identical except that Acton Company uses the LIFO inventory costing method and Baxter Company uses the FIFO inventory costing method. In a period of rising prices, the ratio that will be greater for Acton Company is: a. the current ratio b. the inventory turnover ratio c. the net profit margin ratio d. the accounts receivable turnover ratio 91. All of the following are limitations to ratio analysis EXCEPT that: a. information to calculate the ratios may come from two different financial statements b. ratios are based on historical results c. ompanies choose different accounting methods for depreciation and inventory costing d. interpretation may be difficult due to the effect of unknown economic or competitive forces EXERCISE/PROBLEM 92. For each of the following activities, characteristics, and applications, identify whether they are found in a (C)entralized organization, a (D)ecentralized organization, or (Both) types of organizations. (C / D / Both)a. Freedom for managers at lower organizational levels to make decisions (C / D / Both)b. Best suited to organizations within stable environments (C / D / Both)c. Greater responsiveness to users’ needs (C / D / Both)d.
Use the most efficient technologies (C / D / Both)e. Maximum constraints and minimum freedom for managers at lowest levels (C / D / Both)f. Maximization of benefits over costs (C / D / Both)g. Minimization of duplicate functions (C / D / Both)h. Standard operating procedures (C / D / Both)i. Requires trust in employees at all levels (C / D / Both)j. Primarily task control rather than results control 93. The management accountant for the Elemental Skateboard Company has prepared the following segmented income statement for each of its three product lines.
ChackoOmegadonFieferTotal Sales$400,000$250,000$350,000$1,000,000 Variable expenses260,000150,000190,000600,000 Contribution margin140,000100,000160,000400,000 Other costs 20,000 30,000 20,000 70,000 Segment margin120,00070,000140,000330,000 Allocated avoidable costs 30,000 30,000 20,000 80,000 Segment income90,00040,000120,000250,000 Allocated corporate costs 50,000 50,000 50,000150,000 Corporate profit$40,000$(10,000)$70,000$100,000 Required: a. Do you recommend dropping the Omegadon product line? Why or why not? b. If the Chacko product line had been discontinued, the short-term effect on corporate profits would be a decrease of what amount? c.
Assume that the Fiefer product line has been discontinued and long-term capacity has had time to adjust. The projected long-term effect of this action on annual corporate profits would be a decrease of what amount? d. Assume that an advertising campaign could increase revenues for any of the products by $15,000. To maximize corporate profits, which product line should receive the advertising dollars? Why? e. How would you change the format of the segment margin statement above to make it more understandable? 94. For each of the following, identify whether it BEST relates to (M)arket-based, (C)ost-based, (N)egotiated, (A)dministered, or (All) types of transfer pricing. (M / C / N / A / All)a. Bargaining between selling nd buying units (M / C / N / A / All)b. Objective and provides the proper economic incentives (M / C / N / A / All)c. 145% of full costs (M / C / N / A / All)d. Avoids confrontation and generally used when a transaction occurs frequently (M / C / N / A / All)e. Internal product transfers are required (M / C / N / A / All)f. Prices listed in a trade journal (M / C / N / A / All)g. Prices do not reflect pure economic considerations nor accountability considerations (M / C / N / A / All)h.
Goal is to motivate decision makers to act in the organization’s best interest (M / C / N / A / All)i. Provide no incentive to the supplying division (M / C / N / A / All)j. Reflects support of the controllability principle 95. The Crandon Mill has two divisions. The Cutting Division prepares timber at its sawmills. The Assembly Division prepares the cut lumber into finished wood for the furniture industry. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $660,000. All the lumber was transferred to the Assembly Division where additional operating costs of $6 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000. Required: a.
Determine the operating income for each division if the transfer price from Cutting to Assembly is at cost, $11 a cord. b. Determine the operating income for each division if the transfer price is $9 per cord. c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances? 96. Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished pillows. The covers can be sold separately for $5. 00. The pillows sell for $6. 00. The information related to manufacturing for the most recent year is as follows: |Cover Division |Assembly Division | | |Manufacturing costs of division |$6,000,000 |$1,500,000 | | |Sales to external parties |$4,000,000 |$7,200,000 | | |Market value of covers transferred from the Cover Division to | | |$6,000,000 | |the Assembly Division | | | | Required: a.
Compute the operating income for each division and the company as a whole. Use market value as the transfer price. b. Are all managers happy with this concept? Explain. 97. Department income totals $200,000, investment in the department is $2,000,000, and the company’s cost of capital is 8%. Required: a. Calculate the return on investment (ROI). b. Calculate economic value added. c. Assume there is a capital project that requires a $200,000 investment for a $18,000 return. Would the department manager be more likely to accept the project if department performance was evaluated using ROI or economic value added? Why? 98. |Cash |$ 25,000 |Accounts receivable |$ 15,000 | |Inventory |$ 60,000 | |Equipment, net |$300,000 | |Accounts payable |$ 50,000 | |Bonds payable (long-term) |$180,000 | |Common stock |$ 40,000 | |Retained earnings |$ 130,000 | Required: Use the information above to calculate the following ratios: a. the quick ratio; b. the current ratio; c. the debt ratio; and d. the debt-to-equity ratio. CRITICAL THINKING/ESSAY 99. What is financial control and how does it relate to nonfinancial measures? 100. Discuss at least two inefficiencies of financial control. 101. Describe a cost center. What are some of the problems faced by cost centers? 102. What types of revenues and costs are used to calculate segment margin? 103.
Is segment margin an appropriate measure of financial performance for segment management? Why? 104. Why are transfer prices used? What is a market-based transfer price? 105. A division reports a 24. 5% ROI, a 9. 6% return on sales, and a 2. 55 asset turnover ratio. How can the manager of this division determine whether these results are favorable or not? 106Ratio values standing by themselves have little to no meaning. Describe at least two different ways to make ratios more useful. CHAPTER 12 FINANCIAL CONTROL TRUE/FALSE LO11. a LO12. b LO13. a LO14. a LO25. b LO26. a LO27. b LO38. a LO39. b LO310. a LO311. b LO312. b LO313. a LO314. a LO415. b LO416. b LO417. b LO418. a
LO419. b LO520. a LO521. a LO522. b LO523. a LO724. b LO725. a LO726. a LO827. a LO828. b LO829. a LO830. a MULTIPLE CHOICE LO131. a LO132. c LO133. a LO134. d LO235. b LO236. c LO237. a LO238. d LO239. c LO340. c LO341. d LO342. a LO343. a LO344. b LO345. d LO346. c LO447. a LO448. d LO449. c LO450. d LO451. a LO452. c LO453. a LO454. c LO455. a LO456. d LO557. a LO558. c LO559. c LO560. b LO561. d LO662. c LO663. d LO664. a LO665. b LO766. d LO767. c LO768. b LO769. b LO770. a LO771. b LO772. c LO773. b LO774. a LO775. c LO776. d LO777. a LO778. b LO779. c LO880. d LO881. a LO882. a LO883. b LO884. c LO885. d LO886. c LO887. b LO888. d LO889. c
LO890. b LO891. a MULTIPLE CHOICE 62. $9 x 1. 8 = $16. 20 63. The net income would be the same under both scenarios. 64. Revenue [($10 x 1. 80) x 100,000)] – Costs ($10 x 100,000) = $800,000 Operating income 65. Revenues ($60 x 100,000) – Cost ($26 x 100,000) = $3,400,000 Operating income 72. $600,000 / $2,400,000 = 25% 73. $2,400,000 / $3,000,000 = 80% 74. $600,000 / $3,000,000 = 20% OR 25% x 80% = 20% 87. $10,000 net income / ($15,000 + $25,000) common equity = 25% 88. Debt to equity ratio = total liabilities ($40,000 + $160,000) / total equity ($60,000 + 140,000) = 100%. Quick ratio = ($20,000 + $30,000) / current liabilities $40,000 = 1. 25.
Current ratio = ($20,000 + $30,000 + $50,000) / current liabilities $20,000 = 2. 50. Debt ratio = total liabilities ($40,000 + $160,000) / total assets $400,000 = 50%. 89. Accumulated depreciation will be greater for Company D, resulting in lower total assets. Sales divided by a lower total assets results in a greater asset turnover ratio for Company D. Asset turnover ratio = sales / total assets. 90. Cost of sales is greater when using LIFO and ending inventory is less when using LIFO. Therefore, cost of sales / inventory will be greater for Acton Company. EXERCISE/PROBLEM LO2 92. (C / D / Both)a. Freedom for managers at lower organizational levels to make decisions (C / D / Both)b.
Best suited to organizations within stable environments (C / D / Both)c. Greater responsiveness to user needs (C / D / Both)d. Use the most efficient technologies (C / D / Both)e. Maximum constraints and minimum freedom for managers at lowest levels (C / D / Both)f. Maximization of benefits over costs (C / D / Both)g. Minimization of duplicate functions (C / D / Both)h. Standard operating procedures (C / D / Both)i. Requires trust in employees at all levels (C / D / Both)j. Primarily task control rather than results control LO4 93. a.
No, I would not recommend dropping the Omegadon product line because the $70,000 segment margin indicates that this product line contributes $70,000 toward corporate costs and profits. Also, segment income is $40,000 (positive) which includes all available costs. b. If the Chacko product line were discontinued, corporate profits would immediately decrease by $140,000, the amount reported for the contribution margin. c. If the Fiefer product line were discontinued and long-term capacity has had time to adjust, corporate profits would decrease by $120,000, the amount reported for the segment income. d. To maximize corporate profits, the Feifer product line should receive the advertising dollars because it has a contribution margin of approximately 46%, the highest contribution margin of the three product lines. e.
The current segment margin statement could be made more understandable if the allocated corporate costs were only listed under the company total column, and they were not part of the computation for each product line segment. It is obvious that the corporate costs are arbitrarily allocated equally to each product line and arbitrary allocations do not aid in decision making. LO5 94. (M / C / N / A / All)a. Bargaining between selling and buying units (M / C / N / A / All)b. Objective and provides the proper economic incentives (M / C / N / A / All)c. 145% of full costs (M / C / N / A / All)d.
Avoids confrontation and generally used when a transaction occurs frequently (M / C / N / A / All)e. Internal product transfers are required (M / C / N / A / All)f. Prices listed in a trade journal (M / C / N / A / All)g. Prices do not reflect pure economic considerations nor accountability considerations (M / C / N / A / All)h. Goal is to motivate decision makers to act in the organization’s best interest (M / C / N / A / All)i. Provides no incentive to the supplying division (M / C / N / A / All)j. Reflects support of the controllability principle LO3,6 95. a. |Cutting |Assembly | |Revenue |$660,000* |$2,500,000 | |Cost of services: | | | | Incurred |$ 660,000 |$ 360,000 | | Transferred-in | 0 | 660,000 | | Total |$ 660,000 |$1,020,000 | | | | | | Operating income |$ 0 |$1,480,000 | * 60,000 cords x $11 = $660,000 b. |Cutting |Assembly | |Revenue |$540,000* |$2,500,000 | |Cost of service | | | |Incurred |$ 660,000 |$ 360,000 | |Transferred-in | 0 | 540,000 | | Total |$ 660,000 |$ 900,000 | | | | | |Operating income (loss) |$(120,000) |$1,600,000 | * 60,000 cords x $9 = $540,000 c. The manager of Cutting cares about the transfer price if the division is a profit center but not if it is a cost center.
Under the circumstances, the division probably should be a cost center and it should not worry about the profit it pretends to make by selling to another division. LO6 96. a. | |Cover Division |Assembly Division |Company | |Revenue: | | | | | External |$ 4,000,000 |$7,200,000 |$11,200,000 | | Internal |6,000,000 | 0 | 0 | |
Total |$10,000,000 |$7,200,000 |$11,200,000 | |Cost of goods: | | | | | Incurred |$ 6,000,000 |$1,500,000 |$ 7,500,000 | | Transferred-in | 0 |6,000,000 | 0 | | Total |$ 6,000,000 |$7,500,000 |$ 7,500,000 | | | | | | |Operating income (loss) |$ 4,000,000 |$ (300,000) |$ 3,700,000 | b. The Assembly manager is probably not happy because the division is showing a loss. The manager would probably argue for a transfer price at something less than market price. However, since the market is open and competitive, the market price can be justified. The division needs to either increase its price or reduce its costs if it expects to show a profit. LO7 97. a.
ROI is 10% ($200,000 department income / $2,000,000 investment in the department). b. Economic value added is $40,000 [$200,000 income – $160,000 ($2,000,000 x 8%)]. c. By accepting the proposed project, the department’s ROI will be reduced by 0. 1% to 9. 9%. The department manager being evaluated on ROI will probably reject the $200,000 investment proposal even though the investment exceeds the company’s 8% cost of capital. New ROI of 9. 9% = $218,000 segment income / $2,200,000 investment in the segment. By accepting the proposed project, the economic value added will be increased to $42,000, an increase of $2,000. The department manager being evaluated on economic value added will probably choose to accept the nvestment since it increases economic value added for the department. New economic value added is $42,000 [$218,000 actual income – $176,000 ($2,200,000 x 8%) cost of capital]. LO8 98. a. Quick ratio = ($25,000 + $15,000) / current liabilities $50,000 = 0. 80 b. Current ratio = ($25,000 + $15,000 + $60,000) / current liabilities $50,000 = 2. 00. c. Debt ratio = total liabilities ($50,000 + $180,000) / total assets $400,000 = 57. 5%. d. Debt-to-equity ratio = total liabilities ($50,000 + $180,000) / total equity ($40,000 + $130,000) = 135. 3%. CRITICAL THINKING/ESSAY LO1 99. What is financial control and how does it relate to nonfinancial measures?
Solution: Financial control involves the use of financial measures to assess organization and management performance. Financial measures provide a signal that something is wrong, while nonfinancial measures identify what is wrong. For example, falling sales, a financial measure, indicates that something is wrong. However, the falling sales may result from poor quality, poor service, or high prices, which would be identified by the nonfinancial measures of the organization. LO1 100. Discuss at least two inefficiencies of financial control. Solution: First, financial control focuses on financial measures that do not measure other important attributes such as product quality, employee satisfaction, and customer service.
Because these elements and others are important to the organization’s long-term success, they also should be measured and monitored. Financial control measures the effect of the overall level of performance and ignores the performance achieved on a more detailed level. For this reason, financial control does not suggest how to improve performance, but only serves as a signal of potential problems and opportunities. Financial control is oriented to short-term performance and it only considers how well the organization has performed this quarter or this year. This preoccupation with short-term success is debilitating because little attention gets focused on long-term improvement. LO3 101. Describe a cost center.
What are some of the problems faced by cost centers? Solution: Cost centers are responsibility centers in which managers and other employees control only the costs of the product or service provided. A cost center cannot influence revenues or the level of investment Problems faced by cost centers include the significant behavioral effects of setting standards and interpreting variances on employees who may try to misrepresent performance potential and performance results. Measures other than financial measures of cost may need to be evaluated as well in order to get a clear picture of the cost center’s performance. LO4 102. What types of revenues and costs are used to calculate segment margin?
Solution: The revenues used to compute segment margin include those directly traceable to the segment. Also included is the segment’s allocation of jointly-earned revenues and revenues earned from other responsibility centers that may be based on transfer prices. The costs used to compute segment margin include those directly traceable to the segment. Also included is the segment’s allocation of jointly-incurred costs and costs of items received internally from other responsibility centers that may be based on transfer prices. Only those costs that are considered under the control of the segment manager should be included. LO4 103. Is segment margin an appropriate measure of financial performance for segment management? Why?
Solution: Yes, it is an appropriate measure because all of the revenues and costs used to compute segment margin are directly traceable to the segment and are essentially under the control of the segment manager. Segment income is also a valuable measure of performance because it considers all costs that could be avoided without the segment. LO5 104. Why are transfer prices used? What is a market-based transfer price? Solution: Transfer prices are used internally to value goods and services provided (transferred) by one division to another. The goal of transfer prices is to motivate the decision maker to act in the organization’s best interests.
A market-based transfer price transfers those goods from one division to another at their current market value. LO7 105. A division reports a 24% ROI, a 9. 6% return on sales, and a 2. 55 asset turnover ratio. How can the manager of this division determine whether these results are favorable or not? Solution: Meaning is added when ratios are compared to past performance and trends are revealed. Also, ratios can be compared to industry averages and ratios of comparable organizations. To keep ratios in proper perspective, a background check into a company’s external environment should include information about general economic conditions, political events and political climate, and industry outlook.
The trends or comparative differences help to determine if the division is doing well and they also provide signals of where to look for potential problems and opportunities. LO8 106. Ratio values standing by themselves have little to no meaning. Describe at least two different ways to make ratios more useful. Solution: (1) Meaning is added when ratios are compared to past performance and trends are revealed. (2) To add meaning, compare ratios to other relevant information such as industry averages and ratios of peer companies. (3) To keep ratios in proper perspective, a background check into a company’s external environment should include information about general economic conditions, political events and political climate, and industry outlook.