The use of gross book value (GBV) for
measuring the level of investment in depreciable assets is preferred by those
who value the objectivity of:
A. An historical cost number. B. The depreciation
process. C. Price-level adjusted data.
A declining book value. E. Current-cost information.
14. The use of
replacement cost of assets for purposes of calculating ROI has the advantage(s)
A. Historical accuracy.
Being a sound measure of the level of investment in a continuing business. C.
Consistency with generally accepted accounting principles (GAAP). E. Avoiding
the need for developing estimates of current cost.
15. A primary
limitation of ROI as a performance-evaluation metric for investment centers is
A. Is a
long-term, not short-term, performance indicator.
Excludes the level of investment from the performance metric.
Understates the level of “investment” for organizations operating in
the knowledge-based economy. D. Cannot handle current-value estimates of
Is not a relative performance indicator.
16. Return on
investment (ROI) encourages business units to invest only in projects that
A. A rate of
return greater than borrowing costs.
amount greater than the amount of EVA→ currently being generated.
A rate of return greater than the amount of residual income currently being
earned. D. A rate of return less than the unit’s current ROI.
A rate of return higher than the unit’s current ROI.
residual income (RI) is a dollar amount, in contrast to a percentage (as is
return on investment, ROI), RI:
Allows, through different discount rates, adjustment for differing levels of
risk across investment centers. B. Cannot be used to evaluate the performance
of a given investment center over time.
Is less useful than ROI for performance-evaluation purposes.
Allows for differing investment amounts for different investment centers. E. Is
less useful to stockholders in the company.
residual income (RI) is not a percentage, it is not useful for:
units of significantly different size.
Evaluating the performance of subunits with high ROIs.
Motivating goal-congruent behavior on the part of divisional managers. D.
Evaluating the short-term financial performance of small divisions.
Evaluating the short-term financial performance of larger divisions.
19.In contrast to
residual income (RI), economic value added (EVA→) uses:
The firm’s cost of capital rather than its minimum rate of return. B. A measure
(or estimate) of economic, not accounting, income.
A required rate of return in estimating the amount of profit generated.
Values determined by using conventional accounting policies (i.e., GAAP). E.
Accounting, not economic, measures of income and investment.
simply, transfer pricing is a management tool for assigning a “price”
to internally transferred goods (or services) in order to simulate the
marketplace, thus encouraging mangers to make decisions that are in the best
interest of the:
(i.e., selling) unit within the firm.
as a whole.
of the buying (i.e., purchasing) unit.
units in the short run, and the firm in the long-run.
21. Because the
full-cost method of transfer pricing includes fixed cost, it can:
strict accounting requirements for determining transfer prices.
strict governmental requirements for determining transfer prices.
consistency across state and national borders.
sub-optimal short-term decision making.
22. Use of the
market-price method satisfies a key objective of transfer pricing, namely:
23. A key
standard in international transfer pricing is:
24. The biggest
problem with cost-based transfer prices is:
fact that their use may result in sub-optimal decisions from the standpoint of
the organization as a whole.
much negotiation is involved in determining the transfer price.
are difficult to put into place.
may lead to goal congruence within the firm.