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CPA B3 M5 Study Spring 2020 questions with answers.
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CPA B3 M5 Study Spring 2020 questionswith answers.
one approach to measuring divisional performance is return on assets. Return on assets is expressed as
income: ANS -average total assets
which of the following ratios would be used to evaluate a company's profitability? ANS -gross margin
return on investment (ROI) is criticized as a performance measure since it is not a well balanced
measure. What characteristic of effective performance measures does the ROI lack? ANS -ROI doesn't
balance long and short term issues
which of the following terms represents the residual income that remains after the cost of all capital,
including equity capital, has been deducted? ANS -economic value added
which of the following terms refers to a performance measurement that is calculated as an investment
center's after tax operating income minus the product of its total assets multiplied by the company's
WACC? ANS -economic value added
which of the following methods is best suited for evaluating the performance of a firm's capital in any
given year? ANS -economic value added
which of the following performance measures may lead to a manager of an investment center to forgo
investments that could benefit the company as a whole? ANS -return on investment
which of the following ratios should be used to compare the profitability of two electronics companies
that differ in size? ANS -return on assets
the segment margin of an investment center after deducting the imputed interest on the assets used by
the investment center is known as: ANS -residual income
, the basic objective of the residual income approach of performance measurement and evaluation is to
have a division maximize its: ANS -income in excess of a desired minimum amount
each of the following will affect a company's return on investment, except: ANS -maintaining the
company's cost of capital at current levels
all of the following statements about ROI are correct, except: ANS -ROI is an outstanding performance
measure since it motivates managers to delay or avoid investing in new PPE
Managerial performance can be measured in many different ways including return on investment (ROI)
and residual income. A good reason for using residual income instead of ROI is: ANS -goal congruence is
more likely to be promoted by using residual income
what is the primary disadvantage of using ROI rather than residual income (RI) to evaluate the
performance of investment center managers? ANS -ROI may lead to rejecting projects that yield
positive cash flows
RI is a better measure for performance evaluation of an investment center manager than ROI because:
ANS -desirable investment decisions will not be neglected by high return divisions
the imputed interest rate used in the residual income approach for performance measurement and
evaluation can best be characterized as the: ANS -historical WACC for the company
return on assets (ROA): ANS -is a profitability measure that can be used to evaluate the efficiency of
asset usage and management, and the effectiveness of business strategies to create profits
Micro Manufacturers uses a performance reporting system that combines both financial and non-
financial measures to evaluate division performance. All of the following measure operational efficiency,
except: ANS -residual income
which of the following statements pertaining to the ROI as a performance measurement is incorrect?
ANS -ROI relies on financial measures that are capable of being independently verified while other forms
of performance measures are subject to manipulation
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