SPECIFY IF TRUE OR FALSE, IF FALSE CORRECT THE STATEMENT

Chapter 10:

1. A decentralized business gives decision-making authority to the mangers of its subunits.

2. Two advantages of decentralization are better information at the manager level and quicker response time at the manager level. Additionally, decentralization motivates and trains managers.

3. Two disadvantages of decentralization are a duplication of activities at the different subunits and a lack of goal congruence.

4. Under responsibility accounting, managers are responsible for the revenues and costs that are under their control. A manager should be accountable for only controllable costs.

5. The subunits of a business often are referred to as responsibility centers. Three common responsibility centers are cost centers, profit centers, and investment centers.

6. A manager of a cost center is responsible for controlling costs in that subunit. A manager of a profit center is responsible for generating revenues and controlling costs. A manager of an investment center is responsible for investing assets, generating revenues, and controlling costs.

7. The return on investment (ROI) is used to evaluate the performance of investment centers. ROI is a better than income as a performance measure for an investment center because it compares the amount of income to the amount of investment.

8. However, ROI evaluation can lead to underinvestment when managers reject projects that have returns greater than the required return but that will lower the ROI. Evaluation in terms of profit can lead to overinvestment.

9. ROI is income divided by total assets (invested capital). Know how to calculate ROI. 10. ROI can be separated into a sales margin component and capital (investment) turnover component.

11. Sales margin is income divided by sales. Know how to calculate profit margin. 12. Capital (Investment) turnover is sales divided by total assets (invested capital). Know how to calculate the capital turnover.

13. Residual income is the net operating income less the required profit.

Know how to calculate residual income.

14. The balanced scorecard is another method to evaluate performance. The balanced scorecard considers financial, customer, internal process and growth measures.

15. Flexible budgets can be adjusted for various activity or production levels

16. Managers use the principle of management by exception to investigate the difference between projected results and actual results. Under management by exception, minor differences are not investigated.

Chapter 11:

1. Standards are costs that a business sets as goals. Standards can be set for direct materials, direct labor, and manufacturing overhead.

2. Attainable standards are goals that can be reached with reasonable effort. Attainable standards are not set on perfect performance.

3. A budgeted cost can be calculated by multiplying the standard cost by the number of budgeted units.

4. Generally, manufacturers set standards for price and quantity for direct materials and for rate and efficiency for direct labor.

5. Cost variances are the difference between the standard cost and the actual cost.

6. If the actual cost is greater than the standard cost, the variance is unfavorable. If the actual cost is less than the standard cost, the variance is favorable.

7. A volume variance results from an actual production that is different from the estimated production level.

8. Different departments have responsibility for the different variances. For example, the Purchasing Department usually would be responsible for the direct materials price variance.

Chapter 12:

1. Capital expenditures decisions also are called capital budgeting decisions or capital investment decisions. These decisions involve the acquisition of long-term assets.

2. Both the net present value method and the internal rate of return method use the time value of money in the evaluation of capital investments.

3. The net present value method is the sum of the present values of the cash inflows and cash outflows from an investment.

4. A positive net present value indicates that the rate of return is greater than the required rate of required.

5. The internal rate of return is the rate of return that results in a net present value of zero.

6. If the internal rate of return is greater than the required rate of return (the cost of capital), the investment should be accepted.

7. The payback period is the length of time needed to recover the cost of an investment. Know how to calculate the payback period

8. The payback method does not use the time value of money and does not consider cash flows after the payback date.

Chapter 14: 1. Financial statement analysis provides information for decision-making. The information can be used to control operations, to assess the appearance of the company to investors or creditors, and to assess the financial condition of vendors, customers, and business partners.

2. The Balance Sheet reports assets, liabilities, and owners equity. The Income Statement reports revenues and expenses. The Statement of Cash Flows reports cash inflows and outflows from operating, investing, and financing activities.

3. Horizontal analysis computes the change in each financial statement item both in dollar amount and percentage change. Using comparative financial statements, the amount of change is divided by the base year amount to determine the percentage change.

4. Vertical Analysis highlights the relationship between the items on a financial statement on a percentage basis. On the balance sheet, total assets (or total stockholders' equity and liabilities) are set at 100%. Net sales or net revenue is set at 100% on the income statement. All items on a statement are divided by the 100% standard for that statement. Thus, a common-size statement is produced.

5. Earnings per share is a profitability ratio. Earnings per share is calculated by dividing the net income less preferred dividends by the number of shares of outstanding common

Stock

6. Another profitability ratio, the price-earnings ratio, is the multiple of earnings that an investor pays for the stock. Earnings per share is calculated by dividing the market price per share divided by the earnings per share.

7. Gross profit (gross margin) is equal to net sales less the cost of goods sold. The gross profit (gross margin) percentage is equal to gross profit (gross margin) divided by net sales.

8. Turnover ratios are used to evaluate how efficiently assets are used. A higher number indicates a faster turnover and more efficiency.

9. The accounts receivable turnover is determined by dividing net credit sales by average accounts receivable and the inventory turnover is determined by dividing cost of goods sold by average inventory.

10. The current ratio, the quick ratio, and the debt-to-equity ratio are all debt related ratios that indicate the financing structure of the business and its ability to pays its debts.

11. The current ratio is equal to current assets divided by current liabilities.