PERM Flashcards
A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. Division B’s residual income would be which of the following amounts?
$240
Zig Corp. provides the following information:
Pretax operating profit $300,000,000
Tax rate 40%
Capital used to generate profits
50% debt, 50% equity $1,200,000,000
Cost of equity 15%
Cost of debt 5%
What of the following represent Zip’s year-end economic value-added amount?
a. $1,800,000,000
b. $0
c. $60,000,000
d. $120,000,000
$60,000,000
Green, Inc., financial investment-consulting firm, was engaged by Maple Corp. to provide technical support for making investment decisions. Maple, manufacturer of ceramic tiles, was in the process of buying Bay, Inc., its prime competitor. Green’s financial analyst made an independent detailed analysis of Bay’s average collection period to determine which of the following?
a. Operating profitability.
b. Return on equity.
c. Financing.
d. Liquidity.
Liquidity.
The following is financial data for Laylow Corp. for the last two years.
Balance Sheet 20X1 20X2
Cash $10,000 $20,000
Accounts receivable 40,000 50,000
Inventory 30,000 40,000
Property, plant, and equipment 200,000 250,000
Total assets 280,000 360,000
Current liabilities 50,000 60,000
Long-term debt 150,000 190,000
Stockholders’ equity 80,000 110,000
Total liabilities and stockholders’
equity 280,000 360,000
Income Statement 20X2
Sales $500,000
Cost of goods sold (400,000)
General and administrative
expenses (50,000)
Interest expense (10,000)
Income taxes (10,000)
Net income 30,000
Other information
Depreciation expense $25,000
Number of shares of stock
outstanding 100,000
For 20X2 calculate the average collection period for accounts receivable for Laylow using a 360-day year.
32.4 days
Wexford Co. has a subunit that the following data for year I:
Asset (investment) turnover 1.5 times
Sales $750,000
Return on sales 8%
The imputed interest rate is 12%. What is the division residual income for year I?
$0
A strategy initiative in the balanced scorecard framework is
A key action pagram required to achieve strategic objectives.
Which of the following is not a limitation on the use of ROI as performance measure?
a. It could be affected arbitrarily by allocation of indirect costs.
b. It could cause managers to postpone critical expenditures.
c. It is unrelated to shareholder value.
d. It could cause managers to not accept projects that would be advantageous to the firm.
It is unrelated to shareholder value.
Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?
a. Economic value-added.
b. Net operating capital.
c. Market value-added.
d. Free cash flow.
Economic value-added.
A company reports the following account balances at year-end:
Account Balance
Long-term debt $200,000
Cash 50,000
Net sales 600,000
Fixed assets (net) 320,000
Tax expense 67,500
Inventory 25,000
Common Stock 100,000
Interest expense 20,000
Administrative expense 35,000
Retained earnings 150,000
Accounts payable 65,000
Accounts receivable 120,000
Cost of goods sold 400,000
Depreciation expense 10,000
Additional information :
The opening balance of common stock was $100,000
The opening balance of retained earnings was $32,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
For the year just ended, the company has a profit margin of
11.25%
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the asset turnover ratio for the Consumer Products Division.
2.5
The following information is available for Questmore Industries:
Net operating income after
taxes (NOPAT) $100,000,000
Depreciation expense 65,000,000
Change in net working capital 15,000,000
Capital expenditures 30,000,000
Invested capital (total assets -
current liabilities) $400,000,000
Weighted-average cost of capital 12%
Calculate the economic value added (EVA) for Questmore.
$52,000,000
To measure inventory management performance, a company monitors its inventory turnover ratio. Listed below are selected data from the company’s accounting records :
Current year Prior year
Annual sales $2,525,000 $2,125,000
Gross profit percent 40% 35%
Beginning finished goods inventory for the current year was 15% of the prior year’s annual sales, and ending finished goods inventory was 22% of the current year’s annual sales. What was the company’s inventory turnover at the end of the current period?
3.47
Which of the following would illustrate vertical financial statement analysis?
a. Interest expense as percentage of net sales.
b. Net sales over time.
c. Gross profit compared to industry averages.
d. Earnings per share as compared to the prior year.
Interest expense as percentage of net sales.
A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company’s residual income would be which of the following amounts?
a. $900
b. $0
c. $260
d. $640
$640
The management of company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?
a. Utilize best practices.
b. Forecast.
c. Budget.
d. Benchmark.
Benchmark.
What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?
ROI may lead to rejecting projects that yield positive cash flows.
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the residual income for the Consumer Products Division.
$1,400,000
Which of the statements best describes the concept of six-sigma quality?
a. 10 defects per million.
b. 6.0 defects per million.
c. 100 defects per million.
d. 3.4 defects per million.
3.4 defects per million.
Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and retention are measures used under which of the following perspectives?
a. Financial.
b. Internal business.
c. Customer
d. Learning and growth.
Learning and growth.
Which of the following steps in the strategic planning process should be completed first?
a. Determine actions to achieve goals.
b. Create a mission statement.
c. Translate objectives into goals.
d. Develop performance measures.
Create a mission statement.
A strategy map in the balanced scorecard framework is
Diagrams of the cause-and-effect relationships between strategic objectives.
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the return on sales for the Consumer Products Division
6%
The CFO of a company is concerned about the company’s accounts receivable turnover ratio. The company currently offers customers terms of 3/10, net 30. Which of the following strategies would most likely improve the company’s accounts receivable turnover ratio?
a. Entering into factoring agreement with finance company.
b. Changing customer terms to 1/10, net 30.
c. Pledging the accounts receivable to finance company.
d. Changing customer terms to 3/20, net 30.
Entering into factoring agreement with finance company.
Which of the following is not profitability ratio?
a. Return on assets.
b. Price/earnings ratio.
c. Gross margin.
d. Operating profit margin.
Price/earnings ratio.
A company reports the following account balances at year-end:
Account Balance
Long-term debt $200,000
Cash 50,000
Net sales 600,000
Fixed assets (net) 320,000
Tax expense 67,500
Inventory 25,000
Common Stock 100,000
Interest expense 20,000
Administrative expense 35,000
Retained earnings 150,000
Accounts payable 65,000
Accounts receivable 120,000
Cost of goods sold 400,000
Depreciation expense 10,000
Additional information :
The opening balance of common stock was $100,000
The opening balance of retained earnings was $32,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
For the year just ended, the company has a gross margin of
33.3%
Which of the following is not profitability ratio?
a. Return on assets.
b. Price/earnings ratio.
c. Gross margin.
d. Operating profit margin.
Price/earnings ratio.
The following information is available for Armstrong
Net operating income after taxes $36,000,000
Depreciation expense 15,000,000
Change in net working capital (increase) 10,000,000
Capital expenditures 12,000,000
Invested capital (net assets) 100,000,000
Weighted-average cost of capital 10%
What is the free cash flow for 2012?
29,000,000
The following is financial data for Trabor Corp. for the last two years.
Balance Sheet 20X1 20X2
Current assets $200,000 $230,000
Property, plant, and equipment 800,000 1,000,000
Total assets 1,000,000 1,230,000
Current liabilities 150,000 2500,000
Long-term liabilities 450,000 500,000
Stockholders’ equity 400,000 480,000
Total liabilities and stockholders’
equity 1,000,000 1,230,000
Income Statement 20X2
Sales $700,000
Cost of goods sold (500,000)
General and administrative
expenses (80,000)
Interest expense (30,000)
Income taxes (10,000)
Net income 80,000
Other information
Depreciation expense $15,000
Number of shares of stock
outstanding 100,000
Calculate the operating profit margin for Traber at the end of 20X2.
17.1%
An organization has total asset turnover of 3.5 times and total debt to total assets ratio of 70%. If the organization has total debt of $1,000,000, then it has a sales level of
$5,000,000.00
Which of the following topics is the focus of managerial accounting?
a. The needs of the organization’s internal parties.
b. Financial statements and other financial reports.
c. The needs of creditors.
d. Historical cost principles.
The needs of the organization’s internal parties.
The following is financial data for Trabor Corp. for the last two years.
Balance Sheet 20X1 20X2
Current assets $200,000 $230,000
Property, plant, and equipment 800,000 1,000,000
Total assets 1,000,000 1,230,000
Current liabilities 150,000 250,000
Long-term liabilities 450,000 500,000
Stockholders’ equity 400,000 480,000
Total liabilities and stockholders’
equity 1,000,000 1,230,000
Income Statement 20X2
Sales $700,000
Cost of goods sold (500,000)
General and administrative
expenses (80,000)
Interest expense (30,000)
Income taxes (10,000)
Net income 80,000
Other information
Depreciation expense $15,000
Number of shares of stock
outstanding 100,000
Calculate the debt to equity ratio for Traber at the end of 20X2.
1.56
Galax, Inc. had operating income of $5,000,000 before interest and taxes. Galax’s net book value of plant assets at January I and December 31 were $22,000,000 and $18,000,000 respectively. Galax achieved return on investment for the year, with an investment turnover of 2.5. What were Galax’s sales for the year?
$50,000,000
State Street Corporation had net income of $78,400. What is the return on investment if the amount of investment is $280,000?
28%
The following is financial data for Trabor Corp. for the last two years.
Balance Sheet 20X1 20X2
Current assets $200,000 $230,000
Property, plant, and equipment 800,000 1,000,000
Total assets 1,000,000 1,230,000
Current liabilities 150,000 2500,000
Long-term liabilities 450,000 500,000
Stockholders’ equity 400,000 480,000
Total liabilities and stockholders’
equity 1,000,000 1,230,000
Income Statement 20X2
Sales $700,000
Cost of goods sold (500,000)
General and administrative
expenses (80,000)
Interest expense (30,000)
Income taxes (10,000)
Net income 80,000
Other information
Depreciation expense $15,000
Number of shares of stock
outstanding 100,000
Calculate the return on assets for the Traber at the end of 20X2.
7.2%
The following is available for Cara Corp. for 2012:
Sales $2,000,000
Average invested capital 500,000
Net operating income 300,000
Imputed interest rate 18%
What is the residual income of Cara Corp.?
$210,000
The following is available for Cara Corp. for 2012:
Sales $2,000,000
Average invested capital 500,000
Net operating income 300,000
Imputed interest rate 18%
What is the return on investment of Cara Corp.?
60%
The following is financial data for Traber Corp. for the last two years.
Balance Sheet 20X1 20X2
Current assets $200,000 $230,000
Property, plant, and equipment 800,000 1,000,000
Total assets 1,000,000 1,230,000
Current liabilities 150,000 2500,000
Long-term liabilities 450,000 500,000
Stockholders’ equity 400,000 480,000
Total liabilities and stockholders’
equity 1,000,000 1,230,000
Income Statement 20X2
Sales $700,000
Cost of goods sold (500,000)
General and administrative
expenses (80,000)
Interest expense (30,000)
Income taxes (10,000)
Net income 80,000
Other information
Depreciation expense $15,000
Number of shares of stock
outstanding 100,000
Calculate the gross margin for the Traber at the end of 20X2.
28.6%
A divisional manager receives a bonus based on 20% of the residual income from the division. The results of the division include: Divisional revenues, $1,000,000; divisional expenses, $500,000; divisional assets, $2,000,000; and the required rate of return is 15%. What amount represents the manager’s bonus?
$40,000
In the cost of quality, costs incurred in detecting individual units of product that do not conform to specifications are
Appraisal costs.
In the cost of quality, liability claims are examples o
External failure costs.
The following information is available for Questmore Industries:
Net operating income after
taxes (NOPAT) $100,000,000
Depreciation expense 65,000,000
Change in net working capital 15,000,000
Capital expenditures 30,000,000
Invested capital (total assets -
current liabilities) $400,000,000
Weighted-average cost of capital 12%
Calculate the cash flow for Questmore.
$120,000,000
Which of the following ratios would be used to evaluate company’s profitability?
a. Inventory turnover ratio.
b. Debt to total assets ratio.
c. Current ratio.
d. Gross margin ratio.
Gross margin ratio.
The following is financial data for Traber Corp. for the last two years.
Balance Sheet 20X1 20X2
Current assets $200,000 $230,000
Property, plant, and equipment 800,000 1,000,000
Total assets 1,000,000 1,230,000
Current liabilities 150,000 250,000
Long-term liabilities 450,000 500,000
Stockholders’ equity 400,000 480,000
Total liabilities and stockholders’
equity 1,000,000 1,230,000
Income Statement 20X2
Sales $700,000
Cost of goods sold (500,000)
General and administrative
expenses (80,000)
Interest expense (30,000)
Income taxes (10,000)
Net income 80,000
Other information
Depreciation expense $15,000
Number of shares of stock
outstanding 100,000
Calculate the current ratio for the Traber at the end of 20X2.
92%
The following is financial data for Laylow Corp. for the last two years.
Balance Sheet 20X1 20X2
Cash $10,000 $20,000
Accounts receivable 40,000 50,000
Inventory 30,000 40,000
Property, plant, and equipment 200,000 250,000
Total assets 280,000 360,000
Current liabilities 50,000 60,000
Long-term debt 150,000 190,000
Stockholders’ equity 80,000 110,000
Total liabilities and stockholders’
equity 280,000 360,000
Income Statement 20X2
Sales $500,000
Cost of goods sold (400,000)
General and administrative
expenses (50,000)
Interest expense (10,000)
Income taxes (10,000)
Net income 30,000
Other information
Depreciation expense $25,000
Number of shares of stock
outstanding 100,000
For 20X2 calculate the return on assets for Laylow.
9.4%
The balanced scorecard generally uses performance measures with four different perspectives. Which of the following performance measures would be part of those used for the internal business pacesses perspective?
a. Customer retention.
b. Hours of training per employee.
c. Employee satisfaction.
d. Cycle time.
Cycle time.
Which of the following ratios would most likely be used by the management to evaluate short-term liquidity?
a. Acid test ratio.
b. Accounts receivable turnover.
c. Return on total assets.
d. Sales to cash.
Acid test ratio.
In the balanced scorecard framework, number of defective units produced would appear in which perspective?
a. Learning and growth.
b. Internal business processes.
c. Financial.
d. Customer.
Internal business processes.
Management uses number of techniques to achieve its strategies. The balanced scorecard is primarily designed to
Measure performance.
Vested, Inc. made some changes in operations and provided the following information:
Year 2 Year 3
Operating revenues $ 900,000 $1,100,000
Operating expenses 650,000 700,000
Operating assets 1,200,000 2,000,000
What percentage represents the return on investment for year 3?
25%
A company reports the following account balances at year-end:
Account Balance
Long-term debt $200,000
Cash 50,000
Net sales 600,000
Fixed assets (net) 320,000
Tax expense 67,500
Inventory 25,000
Common Stock 100,000
Interest expense 20,000
Administrative expense 35,000
Retained earnings 150,000
Accounts payable 65,000
Accounts receivable 120,000
Cost of goods sold 400,000
Depreciation expense 10,000
Additional information :
The opening balance of common stock was $100,000
The opening balance of retained earnings was $32,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
For the year just ended, the company has times interest earned of
7.75 times
Which of the following balanced scorecard perspectives examines company’s success in targeted market segments?
a. Internal business pacess.
b. Financial.
c. Customer.
d. Learning and growth.
Customer.
Super Sets, Inc. manufactures and sells television sets. All sales are finalized on credit with terms of 2/10, n/30. Seventy percent of Super Set customers take discounts and pay on day 10, while the remaining pay on day 30. What is the average collection period in days?
16
The following information is available for Armstrong
Net operating income after taxes $36,000,000
Depreciation expense 15,000,000
Change in net working capital (increase) 10,000,000
Capital expenditures 12,000,000
Invested capital (net assets) 100,000,000
Weighted-average cost of capital 10%
What is the amount of the economic value added (EVA)?
26,000,000
A company reports the following account balances at year-end:
Account Balance
Long-term debt $200,000
Cash 50,000
Net sales 600,000
Fixed assets (net) 320,000
Tax expense 67,500
Inventory 25,000
Common Stock 100,000
Interest expense 20,000
Administrative expense 35,000
Retained earnings 150,000
Accounts payable 65,000
Accounts receivable 120,000
Cost of goods sold 400,000
Depreciation expense 10,000
Additional information :
The opening balance of common stock was $100,000
The opening balance of retained earnings was $32,500
The company had 10,000 common shares outstanding all year
No dividends were paid during the year
At the year end, the company has a book value per share, to the nearest cent, of
$25.00
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the spread between the return on investment and the required rate of return for the Consumer Products Division.
7%
The DePaul Corporation had net income of $50,000. What is the amount of the investment if the return on investment is 20%?
$250,000
The following is financial data for Laylow Corp. for the last two years.
Balance Sheet 20X1 20X2
Cash $10,000 $20,000
Accounts receivable 40,000 50,000
Inventory 30,000 40,000
Property, plant, and equipment 200,000 250,000
Total assets 280,000 360,000
Current liabilities 50,000 60,000
Long-term debt 150,000 190,000
Stockholders’ equity 80,000 110,000
Total liabilities and stockholders’
equity 280,000 360,000
Income Statement 20X2
Sales $500,000
Cost of goods sold (400,000)
General and administrative
expenses (50,000)
Interest expense (10,000)
Income taxes (10,000)
Net income 30,000
Other information
Depreciation expense $25,000
Number of shares of stock
outstanding 100,000
For 20X2 calculate inventory turnover for Laylow.
11.4
Sky Bound Airlines provided the following information about its operating divisions:
Passenger Cargo
Operating profit $ 40,000 $50,000
Investment 250,000 500,000
External borrowing rate 6% 8%
Measuring performance using return on investment (ROI), which division performed better?
The Passenger division, with an ROI of 16%. The Cargo division, with an ROI of 10%.
In the balanced scorecard framework, the hours of training of employees would appear in which perspective?
a. Customer.
b. Financial.
c. Internal business processes.
d. Learning and growth.
Learning and growth.
In the cost of quality, which of the following is an example of an “internal failure”?
a. Labor cost of product designers whose task is to design components that will not break under extreme temperature conditions.
b. Cost of inspecting products on the production line by quality inspectors.
c. Cost of reworking defective parts detected by the quality assurance group.
d. Cost of parts returned by customers.
Cost of reworking defective parts detected by the quality assurance group.
Management has identified relationship between customer satisfaction and return on investment. This relationship could be depicted in
Strategy map.
A company has the following in its financial records:
Beginning Balance Ending balance
Cash $ 3,900 $ 3,000
Marketable securities 3,800 4,400
Accounts receivable 14,600 12,900
Total current assets $22,300 $20,300
Net sales $103,200
Expenses 20,430
Net income $ 82,770
What is the company’s receivable turnover ratio?
7.5
Which of the following is not one of the four perspectives of the balanced scorecard?
a. Research and development perspective.
b. Internal business processes perspective.
c. Learning and growth perspective.
d. Customer perspective.
Research and development perspective.
In the cost of quality, spoilage is an example of
Internal failure costs.
An investor has been given several financial ratios for a company but none of the financial reports. Which combination of ratios can be used to derive return on investment?
a. Price to earnings ratio and return on assets.
b. Price to earnings ratio, earnings per share, and net profit margin.
c. Market to book value ratio and total debt to total assets.
d. Return on sales and asset turnover.
Return on sales and asset turnover.
Minon, Inc. purchased long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?
Return on investment Residual income
a. Increase Increase
b. Decrease Decrease
c. Increase Decrease
d. Decrease Increase
Decrease Decrease
A tool which indicates how frequently each type of defect occurs is
Pareto diagram.
The following is financial data for Laylow Corp. for the last two years.
Balance Sheet 20X1 20X2
Cash $10,000 $20,000
Accounts receivable 40,000 50,000
Inventory 30,000 40,000
Property, plant, and equipment 200,000 250,000
Total assets 280,000 360,000
Current liabilities 50,000 60,000
Long-term debt 150,000 190,000
Stockholders’ equity 80,000 110,000
Total liabilities and stockholders’
equity 280,000 360,000
Income Statement 20X2
Sales $500,000
Cost of goods sold (400,000)
General and administrative
expenses (50,000)
Interest expense (10,000)
Income taxes (10,000)
Net income 30,000
Other information
Depreciation expense $25,000
Number of shares of stock
outstanding 100,000
For the end of 20X2 year, calculate the quick ratio for Laylow.
1.17
The following selected data is for the Consumer Products Division of Gerriod Corp.
Sales $50,000,000
Average invested capital (total assets) 20,000,000
Net operating profit 3,000,000
Cost of capital 8%
Calculate the amount of the return on investment for the Consumer Products Division.
15%
