Exam 14: Business Unit Performance Measurement

Using beginning balances for the investment base in computing return on investment (ROI)might encourage managers to acquire assets:

In 2012,Wishbone Corporation had an operating profit of $750,000 and a residual income of $300,000.If Wishbone's cost of capital is 15%,what is the amount of the invested capital?

A firm earning a profit can increase its return on investment by: (CMA adapted)

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)

Which of the following statement(s)is/are true? (A)If a division's return on investment (ROI)exceeds its cost of capital,then its residual income is positive.(B)If a division's cost of capital equals its return on investment (ROI),then its residual income is zero.

Which of the following statements regarding the use of historical costs and current costs to compute return on investment (ROI)is (are)true? (A)Historical costs are based on the original costs to acquire a long-term asset,while current costs represent the costs to replace the long-term asset.(B)For a specific multiple-period project,the return on investment (ROI)computed using current costs will generally be less than the ROI computed using historical costs.

The following information pertains to Bala Co.for the year ended December 31: (CPA adapted) Which of the following equations should be used to compute Bala's return on investment (ROI)?

Residual income is the difference between the divisional income and the cost of invested capital required to operate the division.This is the definition of residual income.

Residual income is similar to the _________ notion of profit as being the amount left over after all costs,including the cost of the capital employed in the division,are subtracted.

Return on investment (ROI)can be decomposed into the asset turnover and the:

In general,it is better to have a higher return on investment (ROI)than a lower one.This implies that either income is higher or the assets are being used more efficiently.

Which of the following statement(s)is/are false? (A)Residual income can be used to compare divisions of different sizes.(B)Residual income can be used to compare divisions that are profit centers.

The asset turnover is a measure (ratio)of an investment center's ability to:

Most organizations use residual income instead of return on investment (ROI)as a performance measure.ROI is much more common than residual income.

The measure (ratio)that reflects the performance of a manager regarding sales and cost of goods sold,but not other operating costs and income taxes,is called the:

One problem associated with using accounting measures to evaluate divisional performance is the measures are based on historical information.Historical costs may not reflect current conditions.

Return on investment (ROI)is a very popular measure employed to evaluate the performance of corporate segments because it incorporates all of the major ingredients of profitability (revenue,cost,investment)into a single measure.Under which one of the following combinations of actions regarding a segment's revenues,costs,and investment would a segment's ROI always increase? (CIA adapted)

After-tax income divided by sales is called the:

It is not possible for a manager to accept an unacceptable project when his/her performance is evaluated using ROI.Since ROI is a ratio,a division with a lower than average ROI may choose a project that does not meet the corporate benchmarks.

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)