Question 1

What is the ROI using historical cost and gross book value?

Accepted Answer

A) a 
B) b 
C) c 
D) d

Question 2

REB Service Co.is a computer service center.For the month of May,REB had the following operating statistics: (CMA adapted) Based on the above information,which one of the following statements is correct? REB has a

Accepted Answer

A) Return on investment of 4%. 
B) Residual income of $(2,000). 
C) Return on investment of 5.6%. 
D) Residual income of $(22,000).

Question 3

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI)of 20%.What was the company's operating profit margin?

Accepted Answer

A) 5.0% 
B) 6.0% 
C) 6.7% 
D) 8.3%

Question 4

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.

Accepted Answer

A) True 
 B)False

Question 5

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.

Accepted Answer

A) True 
 B)False

Question 6

Economic value added (EVA)is a concept that is closely related to residual income.EVA is computed by

Accepted Answer

A) subtracting the adjusted total cost of capital from the adjusted after-tax income. 
B) subtracting adjusted after-tax income from total divisional investment. 
C) dividing adjusted after-tax income by adjusted divisional investment. 
D) dividing adjusted after-tax income by adjusted total cost of capital.

Question 7

James Webb is the general manager of the Industrial Product Division,and his performance is measured using the residual income method.Webb is reviewing the following forecasted information for his division for next year: (CMA adapted) If the cost of capital is 15% and Webb wants to achieve a residual income target of $2,000,000,what will costs have to be in order to achieve the target?

Accepted Answer

A) $9,000,000 
B) $10,800,000 
C) $25,150,000 
D) $25,690,000

Question 8

In general,it is better to have a higher return on investment (ROI)than a lower one.

Accepted Answer

A) True 
 B)False

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

Residual income is a performance evaluation that is used in conjunction with,or instead of,return on investment (ROI).In many cases,residual income is preferred to ROI because (CIA adapted)

Accepted Answer

A) Residual income is a measure over time,while ROI represents the results for one period. 
B) Residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI. 
C) The imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI. 
D) Average investment is employed with residual income while year-end investment is employed with ROI.

Question 11

What is the ROI using historical cost and net book value?

Accepted Answer

A) a 
B) b 
C) c 
D) d

Question 12

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

Accepted Answer

A) the problems associated with measuring the asset base are eliminated. 
B) desirable investment decisions will not be neglected by high return divisions. 
C) only the gross book value of assets needs to be calculated. 
D) returns do not increase as assets are depreciated. 
E) the arguments over the cost of capital are eliminated.

Question 13

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.

Accepted Answer

A) only (
A) is true 
B) only (
B) is true 
C) both (
A) and (
B) are true 
D) neither (
A) and (
B) is true

Question 14

How will increases in the following items affect residual income?

Accepted Answer

A) a 
B) b 
C) c 
D) d

Question 15

Describe the two main limitations of return on investment.

Accepted Answer

The answer of Describe the two main limitations of return...

Question 16

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

Accepted Answer

A) early in the year and dispose of assets late in the year. 
B) early in the year and dispose of assets early in the year. 
C) late in the year and dispose of assets late in the year. 
D) late in the year and dispose of assets early in the year.

Question 17

What is the ROI for each year using net book value?

Accepted Answer

A) a 
B) b 
C) c 
D) d

Question 18

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation? (CMA Adapted)

Accepted Answer

A) Fixed assets employed in division operations. 
B) Land being held by the division as a site for a new plant. 
C) Division inventories when division management exercises control over the amount of short-term credit used. 
D) Division accounts payable when division management exercises control over the amount of short-term credit used.

Question 19

One problem associated with using accounting measures to evaluate divisional performance is the measures are based on historical information.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 14: Business Unit Performance Measurement

What is the ROI using historical cost and gross book value?

REB Service Co.is a computer service center.For the month of May,REB had the following operating statistics: (CMA adapted) Based on the above information,which one of the following statements is correct? REB has a

The FGH Company has an asset turnover of 3.0 times,using assets of $45,000.The company also has a return on investment (ROI) of 20%.What was the company's operating profit margin?

Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities.

Economic value added (EVA)adjustments are made to both the after-tax income and the capital employed.

Economic value added (EVA) is a concept that is closely related to residual income.EVA is computed by

In general,it is better to have a higher return on investment (ROI)than a lower one.

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.

Residual income is a performance evaluation that is used in conjunction with,or instead of,return on investment (ROI) .In many cases,residual income is preferred to ROI because (CIA adapted)

What is the ROI using historical cost and net book value?

Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI) 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.

How will increases in the following items affect residual income?

Describe the two main limitations of return on investment.

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

What is the ROI for each year using net book value?

Which one of the following items would most likely not be incorporated into the calculation of a division's investment base when using the residual income approach for performance measurement and evaluation? (CMA Adapted)

One problem associated with using accounting measures to evaluate divisional performance is the measures are based on historical information.

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