Sheet three - accounting PDF

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MASTER BUDGET AND RESPONSIBILITY ACCOUNTING: Master budgets contain all below sub-budgets

Budgetary slack: describes the practice of underestimating budgeted revenues, or over-estimating budgeted costs, to make budgeted targets more easily achievable. Participative budgeting organization involves its many employees in the budgeting process in a meaningful way Rolling budget: continuous budget, is a budget that is always available for a specified future period. It is created by continually adding a month, quarter, or year to the period that just ended.

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10. The comprehensive set of budgets that serves as a company's overall financial plan is commonly known as: A. an integrated budget. B. a pro-forma budget. C. a master budget. D. a financial budget. E. a rolling budget. 11. A company's plan for the acquisition of long-lived assets, such as buildings and equipment, is commonly called a: A. pro-forma budget. B. master budget. C. financial budget. D. profit plan. E. capital budget. 12. A company's plan for the issuance of stock or incurrence of debt is commonly called a: A. pro-forma budget. B. master budget. C. financial budget. D. profit plan. E. capital budget. 13. A company's expected receipts from sales and planned disbursements to pay bills is commonly called a: A. pro-forma budget. B. master budget. C. financial budget. D. profit plan. E. cash budget. 14. Wilmar Corporation is budgeting its equipment needs on an on-going basis, with a new quarter being added to the budget as the current quarter is completed. This type of budget is most commonly known as a: A. capital budget. B. rolling budget. C. revised budget. D. pro-forma budget. E. financial budget. 15. An organization's budgets will often be prepared to cover: A. one month. B. one quarter. C. one year. D. periods longer than one year. E. All of these.

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16. A manufacturing firm would begin preparation of its master budget by constructing a: A. sales budget. B. production budget. C. cash budget. D. capital budget. E. set of pro-forma financial statements. 17. Which of the following budgets is based on many other master-budget components? A. Direct labor budget. B. Overhead budget. C. Sales budget. D. Cash budget. E. Selling and administrative expense budget. 18. The budgeted income statement, budgeted balance sheet, and budgeted statement of cash flows comprise: A. the final portion of the master budget. B. the depiction of an organization's overall actual financial results. C. the first step of the master budget. D. the portion of the master budget prepared after the sales forecast and before the remainder of the operational budgets. E. the second step of the master budget. 19. Which of the following budgets is prepared at the end of the budget-construction cycle? A. Sales budget. B. Production budget. C. Budgeted financial statements. D. Cash budget. E. Overhead budget. 20. Which of the following would depict the logical order for preparing (1) a production budget, (2) a cash budget, (3) a sales budget, and (4) a direct-labor budget? A. 1-3-4-2. B. 2-3-1-4. C. 2-1-3-4. D. 3-1-4-2. E. 3-1-2-4. 21. The master budget contains the following components, among others: (1) direct-material budget, (2) budgeted balance sheet, (3) production budget, and (4) cash budget. Which of these components would be prepared first and which would be prepared last?

A. Choice A B. Choice B C. Choice C D. Choice D E. Choice E

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22. A company's sales forecast would likely consider all of the following factors except: A. political and legal events. B. advertising and pricing policies. C. general economic and industry trends. D. top management's attitude toward decentralized operating structures. E. competition. 78. Consider the following statements about budgetary slack: I. Managers build slack into a budget so that they stand a greater chance of receiving favorable performance evaluations. II. Budgetary slack is used by managers to guard against uncertainty and unforeseen events. III. Budgetary slack is used by managers to guard against dollar cuts by top management in the resource allocation process. Which of the above statements is (are) true? A. I only. B. II only. C. I and II. D. II and III. E. I, II, and III. 79. When an organization involves its many employees in the budgeting process in a meaningful way, the organization is said to be using an approach most commonly known as: A. budgetary slack. B. participative budgeting. C. budget padding. D. imposed budgeting. E. employee-based budgeting. 80. Which of the following outcomes is (are) sometimes associated with participative budgeting? A. Employees make little effort to achieve budgetary goals. B. Budget preparation time can be somewhat lengthy. C. The problem of budget padding may arise. D. Financial modeling becomes much more difficult to undertake. E. Both choices B and C are correct. 81. Company A uses a heavily participative budgeting approach whereas at Company B, top management develops all budgets and imposes them on lower-level personnel. Which of the following statements is false? A. A's employees will likely be more motivated to achieve budgetary goals than the employees of Company B. B. B's employees may be somewhat disenchanted because although they will be evaluated against a budget, they really had little say in budget development. C. Budget padding will likely be a greater problem at Company B. D. Budget preparation time will likely be longer at Company A. E. Ethical issues are more likely to arise at Company A, especially when the budget is used as a basis for performance appraisal.

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21-CAPITAL BUDGETING AND COST ANALYSIS: Is the process of making long-run planning decision for investment in project. Capital budgeting analyzes each project by considering all the lifespan cash flow from initial investment through its termination life cycle. Capital budget methods to analyze financial information (Discount Cash flow methods) DCF Net Present Value (NPV)*** 1- if I will give you 1000 after one year at 10% what amount you should deposit today?

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Internal Rate of Return (IRR) Is the Rate that forces PV inflows =Cost. This is the same as forcing NPV=0

Both DCF Methods use what is called: The Required Rate Of Return (RRR), The Minimum Acceptable Annual Rate Of Return On An Investment. The RRR Is Internally Set, Usually by Upper Management, And Typically Reflects The Return That An Organization Could Expect To Receive Elsewhere For An Investment Of Comparable Risk. The RRR Is Also Called the Discount Rate, Hurdle Rate, Cost Of Capital, Or Opportunity Cost Of Capital.

Example on Net-present value method : Paige Company is contemplating the acquisition of a machine that costs $50,000 and promises to reduce annual cash operating costs by $11,000 over each of the next six years. Which of the following is a proper way to evaluate this investment if the company desires a 12% return on all investments?

Solution 1- Identify the Cost of Investment = (50,0000) 2-Difference between Present value of Inflow and out flow on investment. PV-Inflow series 11,000 over 6 years at interest 12%

If the in-flow constant during the investment period will chose P-V series cash flow annuity table

11,000 X 4.111 = 45,221

And finally make compare between Cost of investment and PV-of Cash inflow: (50,000) VS 45,221 Internal Rate of Return (IRR)= [Cost of investment / Inflow] And check at given investment period on annuity table which Rate gives you nearest result. 50,000 / 11000=4.55 near to 8%

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6. Capital-budgeting decisions primarily involve: A. emergency situations. B. long-term decisions. C. short-term planning situations. D. cash inflows and outflows in the current year. E. planning for the acquisition of capital. 7. Which of the following would not involve a capital-budgeting analysis? A. The acquisition of new equipment. B. The addition of a new product line. C. The adoption of a new cost driver for overhead application. D. The construction of a new distribution facility. E. The decision of a pro football team to trade for and sign a star quarterback to a long-term contract. 8. The decision process that has managers select from among several acceptable investment proposals to make the best use of limited funds is known as: A. capital rationing. B. capital budgeting. C. acceptance or rejection analysis (ARA). D. cost analysis. E. project planning. 9. Capital budgeting tends to focus primarily on: A. revenues. B. costs. C. cost centers. D. programs and projects. E. allocation tools. 10. Discounted-cash-flow analysis focuses primarily on: A. the stability of cash flows. B. the timing of cash flows. C. the probability of cash flows. D. the sensitivity of cash flows. E. whether cash flows are increasing or decreasing. 11. In a net-present-value analysis, the discount rate is often called the: A. payback rate. B. hurdle rate. C. minimal value. D. net unit rate. E. objective rate of return.

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12. The hurdle rate that is used in a net-present-value analysis is the same as the firm's: A. discount rate. B. internal rate of return. C. minimum desired rate of return. D. objective rate of return. E. discount rate and minimum desired rate of return. 13. Which of the following is taken into account by the net-present-value method?

A. Choice A B. Choice B C. Choice C D. Choice D E. Choice E 14. Consider the following factors related to an investment: I. The net income from the investment. II. The cash flows from the investment. III. The timing of the cash flows from the investment. Which of the preceding factors would be important considerations in a net-present-value analysis? A. I only. B. II only. C. I and II. D. II and III. E. I, II, and III. 15. The true economic yield produced by an asset is summarized by the asset's: A. non-discounted cash flows. B. net present value. C. future value. D. annuity discount factor. E. internal rate of return. 16. The internal rate of return on an asset can be calculated: A. if the return is greater than the hurdle rate. B. if the asset's cash flows are identical to the future value of a series of cash flows. C. if the future value of a series of cash flows can be arrived at by the annuity accumulation factor. D. by finding a discount rate that yields a zero net present value. E. by finding a discount rate that yields a positive net present value.

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17. The internal rate of return: A. ignores the time value of money. B. equates a project's cash inflows with its cash outflows. C. equates a project's cash outflows with its expenses. D. equates the present value of a project's cash inflows with the present value of the cash outflows. E. equates the present value of a project's cash flows with the future value of the project's cash flows.

19. Burkette Company can acquire a $900,000 machine now that will benefit the firm over the next 6 years. Annual savings in cash operating costs are expected to total $190,000. If the hurdle rate is 8%, the investment's net present value is: A. $(181,800). PV inflow = 190,000 X 4.623 =878,370 B. $(21,630). Compare = (900,000)-878,370 C. $44,970. D. $184,920. E. some other amount. 20. Reids Company, which uses net present value to analyze investments, requires a 10% minimum rate of return. A staff assistant recently calculated a $500,000 machine's net present value to be $86,400, excluding the impact of straight-line depreciation. If Reids ignores income taxes and the machine is expected to have a five-year service life, the correct net present value of the machine would be: A. $(13,600). Depreciation Non-cash expense so doesn’t B. $86,400. effect on PV C. $186,400. D. $292,700. E. $465,500. 21. A new asset is expected to provide service over the next four years. It will cost $500,000, generates annual cash inflows of $150,000, and requires cash operating expenses of $30,000 each year. In addition, a $10,000 overhead will be needed in year 3. If the company requires a 10% rate of return, the net present value of this machine would be: A. $(127,110), and the machine meets the company's rate-of-return requirement. B. $(127,110), and the machine does not meet the company's rate-of-return requirement. C. $(129,600), and the machine does not meet the company's rate-of-return requirement. D. $(151,700), and the machine meets the company's rate-of-return requirement. E. some other amount. PV inflow = 150,000 X 3.170 =475,500 PV outflow= [(30,000)X3.170)+(10,000)X0.751=(102,610) Difference between PV-inflow and PV outflow [475,500 -102,610] =372,890 Compare = (500,000)-372,890=

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22. St. Augustine can acquire a $700,000 machine now that will benefit the firm over the next 5 years. A newly hired staff assistant correctly computed the net present value to be $134,020 by using a 10% hurdle rate. On the basis of this information, the machine was expected to produce annual cash operating savings of approximately: A. $166,804. Compare = (700,000)-[PV of inflow ] =134,020 B. $220,000. So PV of inflow = 834,020 C. $268,605. Inflow X 3.791 =834,020 D. $834,020. So the inflow = 834,020/3.791= E. some other amount. 23. A new machine that costs $172,100 is expected to save annual cash operating costs of $40,000 over each of the next nine years. The machine's internal rate of return is: A. approximately 14%. IRR= Cost / inflow and search on annuity table on interest B. approximately 16%. at given period C. approximately 18%. 172,100/ 40,000 = 4.3 D. approximately 20%. E. some other figure not noted above. 24. Paulsen is considering the acquisition of a $217,750 machine that is expected to produce annual savings in cash operating costs of $50,000 over the next six years. If Paulsen uses the internal rate of return (IRR) to evaluate new investments and the company has a hurdle rate of 12%, which of the following statements is correct? A. The machine's IRR is less than 4%, and the machine should not be acquired. B. The machine's IRR is approximately 10%, and the machine should not be acquired. C. The machine's IRR is approximately 10%, and the machine should be acquired. D. The machine's IRR is approximately 12%, and the machine should be acquired. E. All of the preceding statements are false.

Not accept when IRR < Required Rate of Return RRR

25. A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%. The net present value of the machine is: PV inflow = 80,000 X 3.605 =28,840 A. $(3,840). PV outflow= (2000)X3.605=(7,210) B. $(3,370). Difference between PV-inflow and PV outflow C. $0. [475,500 -7,210] =21,630. D. $21,630. Compare = (25,000)-21,630= E. $28,840. 26. A machine costs $25,000; it is expected to generate annual cash revenues of $8,000 and annual cash expenses of $2,000 for five years. The required rate of return is 12%.Which of the following statements about the machine's internal rate of return is true? A. The internal rate of return is greater than 12%. B. The internal rate of return is between 10% and 12%. C. The internal rate of return is less than 10%. D. The internal rate of return must be greater than 15%. E. There is insufficient information to make any judgment about the internal rate of return. IRR= Cost / inflow and search on annuity table on interest at given period 25,000/ 8000 = 3.125

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27. The mayor of Statesville is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is PV inflow = 20,000 X 0.909 =18,180 25,000 X 0.826 =20,650 30,000 X 0.751 =22,530 15,000 X 0.683 =10,245 12,000 X 0.621 =7,452 = 79,057---- Compare with cost

purchased: If Statesville uses a 10% discount rate for capital-budgeting decisions, the net present value of the computer system would be: A. $489. B. $4,057. C. $11,658. D. $63,342. E. $79,057. 28. The mayor of Statesville is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased:

What can be said about the computer system's internal rate of return if the net present value at 12% is positive? Statesville uses a 10% discount rate for capital-budgeting decisions. A. The internal rate of return is greater than 12%. B. The internal rate of return is between 10% and 12%. C. The internal rate of return is less than 10%. D. The internal rate of return must be less than 5%. E. There is insufficient information to make any judgment about the internal rate of return. To Get PV = zero so need higher interest rate of RRR

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29. The mayor of Statesville is considering the purchase of a new computer system for the city's tax department. The system costs $75,000 and has an expected life of five years. The mayor estimates the following savings will result if the system is purchased:

Statesville uses a 10% discount rate for capital-budgeting decisions. A salesperson from a different computer company claims that his machine, which costs $85,000 and has an estimated service life of four years, will generate annual savings for the city of $32,000. If the discount rate is 10%, the net present value of this system would be: A. $16,440. B. $23,175. PV inflow = 32,000 X 3.170=101,440 C. $63,512. Compare = (85,000)-101,404 D. $101,440. E. some other amount. 30. A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if the IRR: A. is greater than the project's net present value. B. equates the present value of the project's cash inflows with the present value of the project's cash outflows. C. is greater than zero. D. is greater than the hurdle rate. E. is less than the firm's cost of investment capital. 31. Which of the following choices correctly states the rules for project acceptance under the net-present-value method and the internal-rate-of-return method?

A. Choice A B. Choice B C. Choice C D. Choice D E. Choice E

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32. The rule for project acceptance under the net-present-value method is that: A. NPV should be greater than zero. B. NPV should be less than zero. C. NPV should equal zero. D. NPV should be less than the hurdle rate. E. NPV should equal the hurdle rate. 33. The rule for project acceptance under the internal rate of return method is that: A. IRR should be greater than zero. B. IRR should be less than zero. C. IRR should be greater than the hurdle rate. D. IRR should be less than the hurdle rate. E. IRR should equal the hurdle rate. 34. The net-present-value method assumes that project funds are reinvested at the: A. hurdle rate. B. rate of return earned on the project. C. cost of debt capital. D. cost of equity capital. E. internal rate of return 35. The internal-rate-of-return method assumes that project funds are reinvested at the: A. hurdle rate. B. rate of return earned on the project. C. cost of debt capital. D. cost of equity capital. E. rate of earnings growth (REG). 36. Which of the following choices correctly states how funds are assumed to be reinvested under the net-present-value method and the internal-rate-of-return method?

A. Choice A B. Choice B C. Choice C D. Choice D E. Choice E 37. A company's hurdle rate is generally influenced by: A. the cost of capital. B. the firm's depreciable assets. C. whether management uses the net-present-value method or the internal-rate-of-return method. D. project risk. E. items "A" and "D" above.

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38. If income taxes are ignored, which of the following choices correctly notes how a project's depreciation is treated under the net-present-value method and the internal-ra...