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ch14 Student: ___________________________________________________________________________ 1. Divisional income statements do not have to follow generally accepted accounting principles (GAAP) because they are internal reports. True False 2. One advantage of using after-tax income as a performance measure of divisional results is it's a financial accounting measure that is also used to compute the organizational income. True False 3. One disadvantage of using after-tax income as a performance measure of divisional results is it's an absolute measure which makes it difficult to compare divisions of significantly different sizes. True False 4. The profit margin ratio is computed by dividing after-tax operating income by sales. True False 5. In general, it is better to have a higher return on investment (ROI) than a lower one. True False 6. One problem associated with using accounting measures to evaluate divisional performance is the measures are based on historical information. True False 7. A problem with ratio-based measures is that managers can make decisions that improve divisional income but lower total organizational income. True False 8. It is not possible for a manager to accept an unacceptable project when his/her performance is evaluated using ROI. True False 9. Residual income is the difference between the divisional income and the cost of invested capital required to operate the division. True False 10. The use of residual income reduces, but does not eliminate, the suboptimization problem. True False
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11. Managerial myopia is the distortion in incentives that result from using accounting measures to evaluate performance. True False 12. Most organizations use residual income instead of return on investment (ROI) as a performance measure. True False 13. Economic value added (EVA) adjustments are made to both the after-tax income and the capital employed. True False 14. Treating research and development costs as an expense rather than a long-term asset may reduce a manager's inclination to participate in research and development activities. True False 15. One problem with economic value added (EVA) adjustments is determining the appropriate life for expenditures that benefit multiple periods. True False 16. Like return on investment (ROI), economic value added (EVA) adjustments fail to sufficiently address the sub-optimization problem. True False 17. In general, a division's investment base includes an allocated share of the corporate headquarters' assets. True False 18. Using net book values instead of gross book values to compute return on investment (ROI) might encourage an investment center manager to delay replacing inefficient assets until they are fully depreciated. True False 19. Current costs should not be used to compute either return on investment (ROI) or residual income because current costs are not generally accepted accounting principles (GAAP). True False
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