Various

Question 1

What are the four methods commonly used for allocating joint costs?

Answer 1

1. relative sales value at split-off
2. physical output,
3. net realizable value (NRV), and
4. constant gross margin NRV.

Question 2

Net Present Value
What does it determine?
What does it predict?
What does it adjust for?

Answer 2

1. determines the discounted rate of return.
2. predicts the present value of money in the future
3. adjusts for the time value of money.

seeks to determine whether the PV of the estimated net future cash inflows at a desired (or required) rate of return will be greater or less than the cost of the proposed investment. An investment proposal is desirable if NPV is positive. In other words, the present value of the future cash inflows is greater than the cost of the investment.

Question 3

An ordinary annuity is a _____?

Answer 3

series of equal cash flows received at the end of regular intervals of time (e.g., end of each month).

Question 4

An annuity due (annuity in advance) is a _______??

Answer 4

a series of equal cash flows received at the beginning of equal intervals of time.

Question 5

What is the present value of an annuity?

Answer 5

the value today of a future series of payments discounted at a particular interest rate;

said another way,
the present value of an annuity can be calculated by restating each of the annuity amounts to the present time period using an annuity formula.

Question 6

What carries the least default risk?

Answer 6

U.S. Treasury bonds are considered risk free. They are the least likely financial instrument to default. Treasury bonds are guaranteed by the U.S. government and are considered the benchmark for secure investment.

Other bonds are rated for creditworthiness by rating agencies such as Standard & Poor’s and Moody’s. The lower the quality of the bond, the higher the interest rate is paid by the issuing firm to compensate for the risk.

Question 7

Cyclical fluctuations, random variations, seasonal variations, and secular trend are all components of:

Answer 7

Time series analysis

focuses on evaluation of trends over time. It may entail several components including seasonal variation and secular trends.

Question 8

If company sales varies by season, what financing method should be used for cash needs?

Answer 8

Line of credit because of flexibility and interest charged only for funds actually being used.

Question 9

Explain what ROI and RI are

Answer 9

Net income is take home after taxes

net income divided by invested capital = Return on investment (ROI)

desired rate of return x invested capital = minimum desired net income

net income above a minimum desired rate of return on invested capital = Residual income (RI)

Division managers would desire to accept projects that exceed the overall corporate cost of capital.

ROI does not consider profitability to the company as a whole because it does not use the corporate cost of capital.

Question 10

What type of risk does the balance sheet and income statement help identify?

Answer 10

Investment risk

Question 11

Income statement is either single-step or multiple-step. Which step lists the revenue and gains at the top?

Answer 11

Single-step lists all revenue and gains at the top of the statement. Then, all expenses and losses are deducted to yield a net income figure.

In a multiple-step income statement, a distinction is made between operating and non operating.