(Test Bank) Managerial Accounting for Undergraduates

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Test Bank

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©Cambridge Business Publishers, 2020 Test Bank, Appendix A A-1 Appendix A Accounting and the Time Value of Money Learning Objectives – Coverage by question True / False Multiple Choice Exercises Essay / Short Answer Problems LO1—Describe the nature of interest and distinguish between simple and compound interest. 1, 2 1 1 LO2—Calculate future values. 3 2, 4 3, 4, 6 2 LO3—Calculate present values. 3 3 1, 2, 5 1 ©Cambridge Business Publishers, 2020 A-2 Managerial Accounting for Undergraduates, 2nd Edition Appendix A: Accounting and the Time Value of Money True/False Topic: Compound Interest LO: 1 1. When interest is earned on interest in a savings account in a bank, this is called compound interest. Answer: True Topic: Time Value of Money LO: 1 2. A dollar received today is worth more than a dollar received two years ago. Answer: False Rationale: A dollar received two years ago is worth more than a dollar received today as it can be invested and will earn additional interest. Topic: Compounding LO: 2, 3 3. If an investment is made that pays 8% annual interest for a 5-year period with quarterly compounding, the number of periods is 60. Answer: False Rationale: There are 20 quarterly periods in five years: 5 years × 4 times per year = 20 periods of compounding. ©Cambridge Business Publishers, 2020 Test Bank, Appendix A A-3 Multiple Choice Topic: Time Value of Money LO: 1 Level of Difficulty: EASY 1. Why is one dollar now worth more than one dollar in the future? A) The amount to be received in the future is smaller than the amount to be paid off today B) The value of interest declines over time C) Funds can be invested in earning assets to yield a positive return D) The time value of money depreciates over long periods of time Answer: C Rationale: Investing money received today generates interest so that the investor will have more accumulated funds compared to waiting to receive funds in the future. Topic: Future Value LO: 2 Level of Difficulty: MEDIUM 2. If Mr. Chips, Inc. invests $2,400,000 today at 6% annual interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested? A) $2,472,000 B) $2,544,000 C) $2,546,160 D) $2,547,273 Answer: C Rationale: Amount at end of 6 months: $2,400,000 + ($2,400,000 × 6% × 6/12) = $2,472,000 Amount at end of 12 months: $2,472,000 + ($2,472,000 × 6% × 6/12) = $2,546,160 Topic: Present Value of an Investment LO: 3 Level of Difficulty: MEDIUM 3. Mr. Chips, Inc. wishes to accumulate $1,200,000 to be used to pay off a balloon note at the end of 5 years. How much will Mr. Chips need to invest today to accumulate the desired amount if the investment earns an annual rate of 8% compounded quarterly? (Select the closest amount.) A) $257,458 B) $1,783,167 C) $807,564 D) $1,086,877 Answer: C Rationale: Present value of $1,200,000 at n = 5 × 4 = 20, I = 8%/4 = 2% PV = $1,200,000 × 0.67297 = $807,564 Financial calculator: N = (5 x 4) = 20 I/Y = (8 / 4) = 2 PV = ? PMT = 0 FV = 1,200,000 PV = $807,565.60 (rounded) ©Cambridge Business Publishers, 2020 A-4 Managerial Accounting for Undergraduates, 2nd Edition Topic: Future Value of an Annuity LO: 2 Level of Difficulty: MEDIUM 4. Mr. Chips, Inc. wishes to accumulate $2,000,000 to be used to pay off a loan at the end of 10 years. How much will Mr. Chips deposit each year for 10 years (rounded to the nearest dollar), beginning at the end of the first year, to accumulate the desired amount if the investment earns an annual rate of 6%? A) $151,736 B) $143,147 C) $259,215 D) $200,000 Answer: A Rationale: Future value of an annuity factor at n = 10, I = 6% PMT = $2,000,000 / 13.18079 = $151,736 (rounded) Financial calculator: N = 10 I/Y = 6 PMT = ? PV = 0 FV = 2,000,000 PMT = 151,736 ©Cambridge Business Publishers, 2020 Test Bank, Appendix A A-5 Exercises Topic: Present Value of a Sum LO: 3 1. Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded annually? Answer: Present value of a single amount of $20,000,000 at n = 5; I = 6% $20,000,000 × 0.74726 = $14,945,200 Financial calculator: N = 5 I/Y = 6 PV = ? PMT = 0 FV = 20,000,000 PV = $14,945,163 (rounded) Topic: Present Value of a Sum LO: 3 2. Electric Motor Company wants to accumulate $20,000,000 to pay off an equipment loan due in 5 years. How much should Electric Motor Company deposit today if the bank pays 6% interest compounded semi-annually? Answer: Present value of a single amount of $20,000,000 at n = 5 × 2 = 10; I = 6%/2 = 3% $20,000,000 × 0.74409 = $14,881,800 Financial calculator: N = (5 x 2) = 10 I/Y = (6 / 2) =3 PV = ? PMT = 0 FV = 20,000,000 PV = $14,881,878 (rounded) Topic: Future Value of an Annuity LO: 2 3. Electric Motor Company wants to accumulate $16,000,000 to pay off an equipment balloon note due in 3 years. How much should Electric Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly? Answer: Future value of an annuity of ? at n = 3 × 4 = 12; I = 4%/4 = 1% = $16,000,000 $16,000,000 / 12.68250 = $1,261,581 (rounded) Financial calculator: N = 12 I/Y = 1 PV = 0 PMT = ? FV = 16,000,000 PMT = $1,261,581 (rounded) ©Cambridge Business Publishers, 2020 A-6 Managerial Accounting for Undergraduates, 2nd Edition Topic: Future Value of a Sum LO: 2 4. Solar Co. needs to have $200 million accumulated to fund health insurance payments for its retirees. Will Solar Co. have enough accumulated at the end of 3 years if it deposits $165 million today if compounding occurs semi-annually with an annual rate of 6%? Answer: Future value of a sum of $165,000,000 at n = 3 × 2 = 6; I = 6%/2 = 3% $165,000,000 x 1.19405 = $197,018,250 Financial calculator: N = (3 x 2) = 6 I/Y = (6/2) =3 PV = 165,000,000 PMT = 0 FV = ? FV = $197,018,629 (rounded) No. It will have $197.019 million accumulated, which is not enough to fund the health insurance. Topic: Installment Note LO: 3 5. Solar Co. borrowed $5,000,000 to buy equipment to be repaid as an installment note monthly over 2.5 years. How much will Solar Co. pay each month if payments begin one month from now and the loan rate is 12% compounded monthly? Answer: Present value of an annuity of ? at n = 2.5 × 12 = 30; I = 12%/12 = 1% $5,000,000 / 25.80771 = $193,741 (rounded) Financial calculator: N = (2.5 x 12) = 30 I/Y = (12 / 12) = 1 PV = 5,000,000 FV = 0 PMT = ? PMT = $193,741 (rounded) Topic: Future Value of a Sum LO: 2 6. Solar Co. borrowed $300,000,000 to buy equipment with the principal and interest to be repaid as a balloon note at the end of 5 years. How much will Solar Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly? Answer: Future value of a sum of $300,000,000 at n = 5 × 4 = 20; I = 8%/4 = 2% $300,000,000 x 1.48595 = $445,785,000 Financial calculator: N = 20 I/Y = 2 PV = 300,000,000 FV = ? PMT = 0 FV = $445,784,219 (rounded) ©Cambridge Business Publishers, 2020 Test Bank, Appendix A A-7 Essay and Short Answer Topic: Time Value of Money LO: 1 1. Why is one dollar now worth more than one dollar in the future? Answer: One reason that a dollar now is worth more than a dollar in the future is risk. Because the future is always uncertain, some event may prevent you from receiving the dollar at a later date. To avoid this risk, we choose the earlier date. A second reason a dollar is worth more now than one dollar in the future is that the dollar has a time value—that is, the dollar received now could be invested such that one year from now, you could have not only the original dollar but also the interest income on the dollar for the past year. ©Cambridge Business Publishers, 2020 A-8 Managerial Accounting for Undergraduates, 2nd Edition Problems Topic: Present Value Calculations LO: 3 1. An investment of $1,600,000 will return $320,000 per year for 6 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year? Answer: Present value of an annuity: $320,000 at n = 6; I = 5% $320,000 × 5.07569 = $1,624,221 (rounded) Financial calculator: N = 6 I/Y = 5 PV =? PMT = 320,000 PV = $1,624,221 (rounded) Yes. Based on the financial aspects of the investment, it should be undertaken as the present value of $1,624,221 is greater than the initial investment. Topic: Future Value Calculations LO: 2 2. Compute the future value for each of the following amounts. a. $200,000 invested today for 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually b. $20,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually Answer: a. Future value of a sum of $200,000 at n = 8; I = 10% (1) $200,000 × 2.14359 = $428,718 Financial calculator: N = 8 I/Y = 10 PV = 200,000 PMT = 0 FV = ? FV = $428,718 (rounded) Future value of a sum of $200,000 at n = 8 × 2 = 16; I = 10%/2 = 5% (2) $200,000 × 2.18287 = $436,574 Financial calculator: N = 16 I/Y = 5 PV = 200,000 PMT = 0 FV = ? FV = $436,575 (rounded) b. Future value of an annuity of $20,000 at n = 4; I = 8% $20,000 × 4.50611 = $90,122 (rounded) Financial calculator: N = 4 I/Y = 8 PV = 0 PMT = 20,000 FV = ? FV = $90,122 (rounded) ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-1 Chapter 1 Overview of Managerial Accounting Learning Objectives – Coverage by question True / False Multiple Choice Exercises Essay / Short Answer Problems LO1—Define managerial accounting and describe its objectives. 1-4 1-3 1-4 LO2—Describe the three types of business entities. 5-8 4-6 5-8 LO3—Discuss major trends in business and managerial accounting. 9-12 7-9 9-12 LO4—Describe important characteristics of two companies used throughout the book to illustrate key concepts and processes. 13-15 10-13 13-16 LO5—Describe career options in managerial accounting. 16-18 14-16 17-20 LO6—Understand differences between various professional certifications available to managerial accountants. 19-21 17-19 21-24 ©Cambridge Business Publishers, 2020 1-2 Managerial Accounting for Undergraduates, 2nd Edition Chapter 1: Overview of Managerial Accounting True/False LO: 1 1. Managerial accounting is primarily concerned with providing information to external users, while financial accounting is used for internal decision making. Answer: False Rationale: Managerial Accounting is used for internal decision making, and Financial Accounting is primarily concerned with providing information to outside users. LO: 1 2. Managerial Accounting provides information relevant to making decisions about the future performance of a company. Answer: True LO: 1 3. Management Accountants are required to report financial results in accordance with legally set guidelines. Answer: False Rationale: Management Accountants “provide information…in a format that is easily accessible to management but not determined by any external organization." (p.5) LO: 1 4. Managerial Accounting utilizes both financial and non-financial data of a company. Answer: True Rationale: "Such data will usually include financial information, but often include non-financial information from both inside and outside the company." (p.5) LO: 2 5. In order to be considered a merchandising firm, a company must have a physical "brick-and-mortar" store location. Answer: False Rationale: Merchandising firms may choose to sell their products exclusively online. LO: 2 6. Of the various types of firms, accounting for the operations of a manufacturing firm is typically the most complex. Answer: True Rationale: "Accounting for manufacturing operations is usually more complex because more activities are involved in producing a product than in purchasing and selling merchandise or providing a service.” (p.6) ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-3 LO: 2 7. A service firm is one that takes materials and converts them into a sellable product. Answer: False Rationale: A Service firm typically does not sell products. LO: 2 8. Merchandising firms can be either wholesalers or retailers. Answer: True Rationale: Both types of companies purchase manufactured goods for resell. LO: 3 9. Many firms have typically used a "just-in-case" inventory system by carrying "safety stock" as a buffer against unforeseen delays. Answer: True LO: 3 10. Lean manufacturing is designed to minimize the amount of time it takes for a product to flow through the production process. Answer: True LO: 3 11. Because information is now so readily accessible to everyone, companies are starting to focus more on the profit margin of each product, and less on the purchasing behavior of individual customers, regardless of how much a person might spend on other products. Answer: False Rationale: “Companies have begun…to focus on ways to increase customer profitability, not just product margin.” (p.10) LO: 3 12. Companies use "Big Data" to regularly track customer behavior in order to anticipate and better meet customers' needs. Answer: True LO: 4 13. Fezzari's number of employees varies with the level of customer demand. Answer: True LO: 4 14. In order to maximize efficiency, Fezzari builds standardized bikes with little or no customization. Answer: False Rationale: “Fezzari provides a 23-point custom setup with each bike sold…” (p.11) ©Cambridge Business Publishers, 2020 1-4 Managerial Accounting for Undergraduates, 2nd Edition LO: 4 15. EBC is relatively new to their industry and does not have a strong customer base. Answer: False Rationale: “EBC has performed thousands of consulting projects for hundreds of municipal agencies…” (p. 12) LO: 5 16. Accountants have a very normal schedule, and typically work 40 hours/week or less. Answer: False Rationale: Accountants usually work more than 40 hours/week, depending on deadlines that need to be met. LO: 5 17. A managerial accountant may be involved in aspects of the business such as manufacturing planning, change implementation, strategy, customer analysis, and others. Answer: True LO: 5 18. Every new accounting graduate must begin their career working at one of the "Big 4" accounting firms. Answer: False Rationale: “Approximately 35,000, or 44%, of these students began their careers in public accounting.” (p.13) LO: 6 19. The CPA is the most widely recognized professional certification for accountants in the United States. Answer: True LO: 6 20. The CMA does not indicate a level of true professional achievement. Answer: False Rationale: "The CMA is a professional certification administered by the Institute of Management Accountants (IMA) intended to indicate a level of knowledge and proficiency with accounting and financial management skill" (p.15) LO: 6 21. The Institute of Management Accountants (IMA) administers the CMA exam. Answer: True ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-5 Multiple Choice LO: 1 1. Management Accountants provide information that is: A) Timely B) Relevant C) Useful for making decisions D) Easily accessible to management E) All of the above Answer: E Rationale: Managerial Accounting is needs information with all these qualities. LO: 1 2. Managerial Accounting provides information which is primarily useful for: A) Helping managers plan, manage, and make strategic decisions regarding the growth and profitability of the company B) Helping banks know whether to loan money to a company C) Setting a company’s stock price on the stock exchanges D) Determining how much a company owes to the IRS in taxes Answer: A Rationale: Managerial accounting is concerned with making decisions that affect the internal operations of a company, not with reporting to external entities. LO: 1 3. Which of the following is not a source of information used by Management Accountants? A) Upper management B) Line employees C) Financial results of the company’s operations D) All of these are sources of managerial accounting information Answer: D Rationale: Management Accountants use information at all levels of the company, including both financial and non-financial data. LO: 2 4. Which of the following is an example of a manufacturing firm? A) Walmart B) Caleb’s Carpet Cleaning Company C) Starbucks D) General Motors Answer: D ©Cambridge Business Publishers, 2020 1-6 Managerial Accounting for Undergraduates, 2nd Edition LO: 2 5. Which of the following types of firms normally carry inventory? A) Service firms B) Manufacturing firms C) Merchandising firms D) All of the above E) B and C only Answer: E Rationale: Both Merchandising and Manufacturing firms carry inventory, while Service firms typically do not. LO: 2 6. All of the following are examples of a service firms except: A) Online retailers B) Professional taxi services C) Public accounting firms D) Lawn care companies Answer: A LO: 3 7. All of the following are benefits of outsourcing except: A) Ability to provide services from anywhere in the world B) Companies can focus more efforts on core business activities C) Significantly faster service and higher quality of products and services D) Not having to worry about under-utilized, undertrained staff Answer: C Rationale: Potential drawbacks of outsourcing include unexpected delays and lower quality of goods and services. LO: 3 8. Which of the following utilizes multiple automated machines and manufacturing cells to produce a product from start to finish? A) Robotics-controlled automated manufacturing B) Full-production automation C) Stand-alone automation D) Flexible-manufacturing system automation Answer: D LO: 3 9. Just-in-time (JIT) inventory systems are designed to reduce which of the following: A) Costs of carrying inventory B) Possibility of delayed shipments C) Threat of lost sales due to unexpected demand D) All of the above Answer: A ©Cambridge Business Publishers, 2020 Test Bank, Chapter 1 1-7 LO: 4 10. Which of the following is not part of Fezzari’s assembly and shipping process? A) A test ride by one of the technicians B) Checking all of the screws and tuning C) Checking the packaging D) A test ride by the customer Answer: D Rationale: One of the drawbacks of the business model is that the customer is unable to "kick the tires" of the bicycle, so to speak, before purchasing it. LO: 4 11. What type of firm is EBC? A) Service firm B) Merchandising firm C) Manufacturing firm D) Two of the above E) None of the above Answer: A LO: 4 12. EBC specializes in consulting all of the following organizations except: A) County governments B) City governments C) Special districts D) State governments Answer: D Rationale: “EBC provides consulting services to the local government market, including cities, counties, and special districts” (p.12) LO: 4 13. How does Fezzari generally market its products to its customers? A) Selling directly to customers through web-based orders B) Manufacturing and selling bike components to other bike manufacturers C) As a wholesaler supplying local bike shops D) As a wholesaler supplying large mass merchandisers Answer: A LO: 5 14. Of those who begin their careers in public accounting, on average, what percentage will leave to take positions in corporations or other organizations? A) 25% B) 90% C) 75% D) 50% Answer: B