Final Exam

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Final Exam
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Managerial Accounting
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  1. The book value of old equipment is not a relevant cost in a decision.
    True
  2. One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.
    True
  3. A differential cost is a variable cost.
    False because both variable and fixed costs may be differential costs.
  4. All future costs are relevant in decision making.
    False because future costs are relevant only if they differ among the alternatives.
  5. A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes.
    False because sunk costs occurred in the past and cannot be changed by future decisions. They are never relevant.
  6. For which of the following decisions are opportunity costs relevant?

    A. Yes, the decisions to make or buy a needed part. Yes, the decision to keep or drop a product line.

    B. Yes, the decisions to make or buy a needed part. No, the decision to keep or drop a product line.

    C. No, the decisions to make or buy a needed part. Yes, the decision to keep or drop a product line.

    D. No, the decisions to make or buy a needed part. No, the decision to keep or drop a product line.
    A. Yes, the decisions to make or buy a needed part. Yes, the decision to keep or drop a product line.
  7. Which of the following costs are always irrelevant in decision making?

    A. avoidable costs

    B. sunk costs

    C. opportunity costs

    D. fixed costs
    B. sunk costs
  8. For which of the following decisions are sunk costs relevant?

    A. The decision to keep an old machine or buy a new one.

    B. The decision to sell a product at the split-off point or after further processing.

    C. The decision to accept or reject a special order offer.

    D. All of these.

    E. None of these.
    E. None of these.
  9. The opportunity cost of making a component in a factory with excess capacity
    for which there is no alternative use is:

    A. The variable manufacturing cost of the component.

    B. The total manufacturing cost of the component.

    C. The fixed manufacturing cost of the component.

    D. Zero.
    D. Zero.
  10. In deciding whether to manufacture a part or buy it from an outside supplier, which of the following costs are irrelevant?

    A. Yes, fixed overhead that will continue even if the part is bought from an outside supplier. Yes, freight charges paid by the purchaser if the part is bought from an outside supplier.

    B. Yes, fixed overhead that will continue even if the part is bought from an outside supplier. No, freight charges paid by the purchaser if the part is bought from an outside supplier.

    C. No, fixed overhead that will continue even if the part is bought from an outside supplier. Yes, freight charges paid by the purchaser if the part is bought from an outside supplier.

    D. No, fixed overhead that will continue even if the part is bought from an outside supplier. No, freight charges paid by the purchaser if the part is bought from an outside supplier.
    C. No, fixed overhead that will continue even if the part is bought from an outside supplier. Yes, freight charges paid by the purchaser if the part is bought from an outside supplier.
  11. United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their:

    A. gross margin

    B. contribution margin

    C. selling price

    D. contribution margin per unit of the constrained resource
    D. contribution margin per unit of the constrained resource
  12. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?

    A. -$20,900

    B. $11,900

    C. -$7,600

    D. -$1,400
    D. -$1,400

  13. Mcneilly Inc. is considering using stocks of an old raw material in a special project. The special project would require all 220 kilograms of the raw material that are in stock and that originally cost the company $1,804 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $8.55 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $7.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $97.00 for all 220 kilograms. What is the relevant cost of the 220 kilograms of the raw material when deciding whether to proceed with the special project?

    A. $1,705

    B. $1,881

    C. $1,804

    D. $1,608
    D. $1,608

  14. Govoni Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 9,500 units of component AIG. Each unit of AIG requires 6 units of material M51 and 4 units of material M93. Data concerning these two materials follow:



    Material M51 is in use in many of the company's products and is routinely replenished. Material M93 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

    What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product AIG?

    A. $505,667

    B. $502,550

    C. $458,850

    D. $464,550
    • D. $464,550
    •    Material M51 (6 units x $5.25 x 9,500 units): $299,250
    •    Material M93 (4 units x $4.35 x 9,500 units): $165,300
    •    Relevant costs of 9,500 units of AIG: $299,250 + $165,300 = $464,550
  15. Part J88 is used in one of Quinney Corporation's products. The company makes 3,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity:



    An outside supplier has offered to produce this part and sell it to the company for $32.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided.

    If management decides to buy part J88 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

    A. Net operating income would decline by $22,200 per year.

    B. Net operating income would decline by $16,200 per year.

    C. Net operating income would decline by $5,400 per year.

    D. Net operating income would decline by $19,200 per year.
    C. Net operating income would decline by $5,400 per year.

  16. Supreme Celery Corporation manufactures four celery based products. Floods and fire on the west coast are going to cause a shortage of celery for Supreme next month. Information related to the four celery products that it produces are shown below. The numbers relate to the cost per case and the amount of celery per case of product:



    To maximize profit next month, in what order would it be best for Supreme to schedule production (first to last)?

    A. Jelly, Cracker Spread, Soup, Snack Bars

    B. Jelly, Snack Bars, Cracker Spread, Soup

    C. Cracker Spread, Snack Bars, Jelly, Soup

    D. Snack Bars, Jelly, Soup, Cracker Spread
    C. Cracker Spread, Snack Bars, Jelly, Soup

  17. Consider the following statements: 

    I. A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated.

    II. Many companies feel they can control quality better by making their own parts.

    III. A vertically integrated company realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations.

    Which of the above statements represent advantages to a company that is vertically integrated?

    A. Only I
    B. Only I and II
    C. Only II and III
    D. Only III
    C. Only II and III
    (this multiple choice question has been scrambled)
  18. Sheela Dairy Corporation buys unprocessed cows' milk from local farmers. At the dairy, this unprocessed milk is broken down into cream and low-fat milk. The cream can be sold at this point or can be further processed into butter. Which of the following would be relevant in the decision to further process the cream into butter?

    A. the amount paid to the farmers to purchase the unprocessed milk.

    B. the cost of breaking down the unprocessed milk into cream and low-fat milk.

    C. the portion of corporate fixed expenses that are currently being allocated to cream.

    D. none of these.
    D. none of these.
  19. In a plant operating at capacity:

    A. every machine and person in the plant is working at the maximum possible rate.

    B. only some specific machines or processes are operating at the maximum rate possible.

    C. profits are maximized.

    D. managers should produce those products with the highest contribution margin in order to deal with the constrained resource.
    B. only some specific machines or processes are operating at the maximum rate possible.
  20. Which product would be selected in a decision that involves the utilization of a constrained resource?

    A. the product with the lowest total cost per unit.

    B. the product with the lowest variable cost per unit.

    C. the product that uses the least amount of constrained resource per unit.

    D. the product with the highest contribution margin per unit.

    E. the product with the highest contribution margin per unit of the constrained resource.
    E. the product with the highest contribution margin per unit of the constrained resource.
  21. The net present value method assumes that cash flows from a project are immediately reinvested at a rate of return equal to the discount rate.
    True
  22. When using internal rate of return to evaluate investment projects, if the internal rate of return is less than the required rate of return, the project would be accepted.
    False
  23. In preference decision situations, a project with a high net present value will always be preferable to a project with a lower net present value.
    False
  24. An investment project with a project profitability index of less than zero should ordinarily be rejected.
    True
  25. Screening decisions follow preference decisions and seek to rank investment proposals in order of their desirability.
    False
  26. The payback period is the length of time it takes for an investment to recoup its initial cost out of the cash receipts it generates.
    True
  27. The payback method of making capital budgeting decisions gives full consideration to the time value of money.
    False
  28. (Ignore income taxes in this problem.) How is depreciation handled by the following capital budgeting techniques?

    A. Excluded, Included, Excluded
  29. A weakness of the internal rate of return method for screening investment projects is that it:

    A. does not consider the time value of money.

    B. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate.

    C. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.

    D. does not take into account all of the cash flows from a project.
    C. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
  30. The payback method measures:

    A. how quickly investment dollars may be recovered.

    B. the cash flow from an investment.

    C. the economic life of an investment.

    D. the project profitability of an investment.
    A. how quickly investment dollars may be recovered.
  31. (Ignore income taxes in this problem.) Cuarto Corporation just invested in a project that has an internal rate of return of 24%. This project is expected to generate $44,000 of net cash inflows each year of its 6 year life. The project has no salvage value.

    What was the initial investment required for this project?

    A. $63,360

    B. $72,600

    C. $132,880

    D. $160,000
    C. $132,880

    • Initial investment
    • = Net cash inflows x Present value factor
    • = $44,000 x 3.02
    • = $132,880
  32. (Ignore income taxes in this problem.) Given the following data:

    Present investment required: $12,000
    Net present value: $430
    Annual cost savings: $?
    Discount rate: 12%
    Life of the project: 10 years

    Based on the date given, the annual cost savings would be:

    A. $1,630.00

    B. $2,200.00

    C. $2,123.89

    D. $2,553.89
    B. $2,200.00

    The present value of the annual cost savings must be $12,430 given that the net present value is $430 and the present investment is $12,000. To find the annual cost savings you need to divide the present value of the annual cost savings by the present value factor ($12,430 ÷ 5.65); the annual cost savings equals $2,200.
  33. (Ignore income taxes in this problem.) Parks Company is considering an investment proposal in which a working capital investment of $10,000 would be required. The investment would provide cash inflows of $2,000 per year for six years. The working capital would be released for use elsewhere when the project is completed. If the company's discount rate is 10%, the investment's net present value is:

    A. $1,290

    B. $(1,290)

    C. $2,000

    D. $4,350
    D. $4,350

  34. (Ignore income taxes in this problem.) Boston Company is contemplating the purchase of a new machine on which the following information has been gathered:

    Cost of the machine: $38,900
    Annual cash inflows expected: $10,000
    Salvage value: $5,000
    Life of the machine: 6 years

    The company's discount rate is 16%, and the machine will be depreciated using the straight-line method. Given these data, the machine has a net present value of:

    A. -$26,100

    B. -$23,900

    C. $0

    D. +$26,100
    C. $0

  35. (Ignore income taxes in this problem.) The Whitton Company uses a discount rate of 16%. The company has an opportunity to buy a machine now for $18,000 that will yield cash inflows of $10,000 per year for each of the next 3 years. The machine would have no salvage value. The net present value of this machine is:

    A. $22,460

    B. $4,460

    C. $(9,980)

    D. $12,000
    • B. $4,460
    • Net present value
    • = -$18,000 + ($10,000 x 2.246)
    • = -$18,000 + $22,460
    • = $4,460
  36. (Ignore income taxes in this problem.) The following information concerns a proposed investment:

    Investment required: $14,150
    Annual savings: $2,500
    Life of the project: 12 years

    The internal rate of return is (do not interpolate):

    A. 14%

    B. 12%

    C. 10%

    D. 5%
    A. 14%

    The present value factor for the internal rate of return is 5.66 ($14,150 ÷ $2,500); this factor associated with a 12-year investment represents an internal rate of return of 14%.
  37. (Ignore income taxes in this problem) The management of Boie Corporation is considering the purchase of a machine that would cost $330,980 and would have a useful life of 6 years. The machine would have no salvage value. The machine would reduce labor and other operating costs by $76,000 per year. The internal rate of return on the investment in the new machine is closest to:

    A. 11%

    B. 10%

    C. 12%

    D. 7%
    B. 10%

    The present value factor for the internal rate of return is 4.355 ($330,980 ÷ $76,000); this factor associated with a 6-year investment represents an internal rate of return of 10%.
  38. (Ignore income taxes in this problem.) Jarvey Company is studying a project that would
    have a ten-year life and would require a $450,000 investment in equipment which has no salvage value. The project would provide net income each year as follows for the life of
    the project:

    Sales: $500,000
    Less cash variable expenses: $200,000
    Contribution margin: $300,000
    Less fixed cash expenses: $150,000
    Less depreciation expenses: $45,000
    Net operating income: $105,000

    The company's required rate of return is 12%. What is the payback period for this project?

    A. 3 years

    B. 2 years

    C. 4.28 years

    D. 9 years
    A. 3 years

    The payback period is the investment cost of $450,000 ÷ [$150,000($105,000 + $45,000)] annual cash flow; $450,000 ÷ $150,000 = 3 years.
  39. (Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment which has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment.

    Assuming that the cash inflows occur evenly over the year, the payback period for the investment is:

    A. 0.75 years

    B. 1.67 years

    C. 4.91 years

    D. 2.50 years
    D. 2.50 years

    The cumulative cash flow after two years is $180,000 ($120,000 + $60,000), therefore an additional $20,000 of cash flow is needed in year three to recover the initial $200,000 investment. It will take one-half ($20,000 ÷ $40,000) of year three to recover the additional $20,000. The payback period is therefore 2.5 years.
  40. (Ignore income taxes in this problem.) Denny Corporation is considering replacing a technologically obsolete machine with a new
    state-of-the-art numerically controlled machine. The new machine would cost $450,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate and maintain, but would save $100,000 per year in labor and other costs. The old machine can be sold now for scrap for $50,000. The simple rate of return on the new machine is closest to:

    A. 8.75%.

    B. 20.00%.

    C. 7.78%.

    D. 22.22%.
    A. 8.75%

    The simple rate of return of 8.75% is calculated by dividing $35,000 ($100,000 - $20,000 - $45,000) by $400,000 ($450,000 - $50,000).
  41. (Ignore income taxes in this problem.) Tighe Corporation is contemplating purchasing equipment that would increase sales revenues by $420,000 per year and cash operating expenses by $231,000 per year. The equipment would cost $747,000 and have a 9 year life with no salvage value. The annual depreciation would be $83,000. The simple rate of return on the investment is closest to:

    A. 25.3%

    B. 14.2%

    C. 11.1% 

    D. 25.2%
    B. 14.2%

    The simple rate of return of 14.2% is calculated by dividing $106,000 ($420,000 - $231,000 - $83,000) by $747,000.
  42. The gross margin percentage is computed taking the difference between sales and cost of goods and then dividing the result by sales.
    True
  43. The gross margin percentage is computed by dividing net income before interest and taxes by sales.
    False
  44. The price-earnings ratio is computed by dividing the market price per share by the current earnings per share.
    True
  45. When computing the return on total assets, the after-tax effect of interest expense must be subtracted from net income.
    False
  46. If the assets in which funds are invested have a rate of return lower than the fixed rate of return paid to the supplier of the funds, then financial leverage is positive.
    False
  47. When computing the acid-test ratio, prepaid expenses are ignored.
    True
  48. Horizontal analysis of financial statements is accomplished through:

    A. placing statement items on an after-tax basis.

    B. common-size statements.

    C. computing both earnings per share and the price-earnings ratio.

    D. trend percentages.
    D. trend percentages.
  49. An increase in the market price of a company's common stock will immediately affect its:

    A. dividend yield ratio.

    B. debt-to-equity ratio.

    C. earnings per share of common stock.

    D. dividend payout ratio.
    A. dividend yield ratio.
  50. If a company's bonds bear an interest rate of 8%, the tax rate is 30%, and the company's assets are generating an after-tax return of 7%, then the leverage would be:

    A. positive.

    B. negative.

    C. neither positive or negative.

    D. impossible to determine without knowing the return on common stockholders' equity.
    A. positive.
  51. Allen Company's average collection period for accounts receivable was 40 days last year, but increased to 60 days this year. Which of the following would most likely account for this change?

    A. a decrease in accounts receivable relative to sales.

    B. a decrease in sales.

    C. a relaxation of credit policies.

    D. an increase in sales.
    C. a relaxation of credit policies.
  52. Litten Corporation's most recent income statement appears below:



    The gross margin percentage is closest to:

    A. 92.0%

    B. 416.5%

    C. 24.0%

    D. 47.9%
    D. 47.9%

    • Gross margin percentage = Gross margin ÷ Sales
    • $379,000 ÷ $791,000 = 47.9%
  53. Craston Company's net income last year was $70,000. The company paid preferred dividends of $10,000 and its average common stockholders' equity was $480,000. The company's return on common stockholders' equity for the year was closest to:

    A. 12.5%

    B. 14.6%

    C. 16.7%

    D. 2.1%
    A. 12.5%

    Return on common stockholders' equity = (Net income - Preferred dividends) ÷ (Average total stockholders' equity - Average preferred stock)

    • = ($70,000 - $10,000) ÷ $480,000
    • = $60,000 ÷ $480,000
    • = 12.5% 
  54. Fulton Company's price-earnings ratio is 8.0 and the market price of a share of common stock is $32. The company has 3,000 shares of preferred stock outstanding with each share receiving a dividend of $3 per share. The earnings per share of common stock is:

    A. $10

    B. $7

    C. $4

    D. $3
    C. $4

    Price-earnings ratio = Market price per share ÷ Earnings per share

    • 8 = $32 ÷ Earnings per share
    • $32 ÷ 8 = $4 Earnings per share
  55. Information concerning the common stock of Morris Company as of the end of the company's fiscal year is presented below.

    Number of shares outstanding 460,000
    Par value per share: $5.00
    Dividends paid per share: $6.00
    Market price per share: $54.00
    Earnings per share: $18.00

    The dividend yield ratio is closest to:

    A. 50.0%

    B. 33.3%

    C. 120.0%

    D. 11.1%
    D. 11.1%

    Dividend yield ratio = Dividends per share ÷ Market price per share

    $6.00 ÷ $54.00 = 11.1%
  56. Bracken Company's net income last year was $85,000 and its interest expense was $10,000. Total assets at the beginning of the year were $660,000 and total assets at the end of the year were $600,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:

    A. 14.6%

    B. 14.0%

    C. 13.5%

    D. 15.1%
    A. 14.6%

    Return on total assets = {Net income + [Interest expense x (1 - Tax rate)]} ÷ Average total assets

    • = {$85,000 + [$10,000 x (1 - 0.30)]} ÷ [($660,000 + $600,000) ÷ 2]
    • = ($85,000 + $7,000) ÷ $630,000
    • = $92,000 ÷ $630,000
    • = 14.6%
  57. The following account balances have been provided for the end of the most recent year:

    Total assets: $180,000
    Total stockholders' equity: $150,000
    Total common stock: $60,000 (5,000 shares)
    Total preferred stock: $10,000 (1,000 shares)

    The book value per share is:

    A. $28

    B. $25

    C. $36

    D. $34
    A. $28

    • Book value per share = (Total stockholders' equity - Preferred stock) ÷ Number of common shares outstanding
    • = ($150,000 - $10,000) ÷ 5,000
    • = $140,000 ÷ 5,000
    • = $28
  58. Wernett Corporation's net income for the most recent year was $1,509,000. A total of 200,000 shares of common stock and 100,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $4.95 per share and dividends on preferred stock were $1.35 per share. The earnings per share of common stock is closest to:

    A. $1.92

    B. $7.55

    C. $6.87

    D. $2.60
    C. $6.87

    Earnings per share = (Net income - Preferred Dividends) ÷ Average number of common shares outstanding

    • = [$1,509,000 - (100,000 x $1.35)] ÷ 200,000
    • = ($1,509,000 - $135,000) ÷ 200,000
    • = $1,374,000 ÷ 200,000
    • = $6.87
  59. Iffert Corporation's net income last year was $4,040,000. The dividend on common stock was $6.40 per share and the dividend on preferred stock was $2.30 per share. The market price of common stock at the end of the year was $43.30 per share. Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:

    A. 0.50

    B. 0.91

    C. 1.02

    D. 0.48
    A. 0.50

    Earnings per share = (Net income - Preferred dividends) ÷ Average number of common shares outstanding

    • = [$4,040,000 - (100,000 x $2.30)] ÷ 300,000
    • = ($4,040,000 - $230,000) ÷ 300,000
    • = $3,810,000 ÷ 300,000
    • = $12.70

    Dividend payout rate = Dividends per share ÷ Earnings per share

    • = $6.40 ÷ $12.70
    • = 0.50
  60. Montgomery Corporation's most recent income statement appears below: 



    The beginning balance of total assets was $720,000 and the ending balance was $730,000. The return on total assets is closest to: 

    A. 17.4%

    B. 21.2%

    C. 24.8%

    D. 30.3%
    B. 21.2%

    Return on total assets = {Net income + [Interest expense (1 - Tax rate)]} ÷ Average total assets

    • = {$126,000 + [$40,000 x (1 - 0.30)]} ÷ [($720,000 + $730,000) ÷ 2]
    • = ($126,000 + $28,000) ÷ $725,000
    • = 21.2%

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