970 1 Chapter 23 Z BLEM REVIEW QUESTIONS AND PROBL™ Questions alculated? UF 2. 12. 13. . il ci What is return on investment, and how is it out when usin; 01 ed about whe! g What are the measurement issues to be © ncern return on investment? il ‘2 imitati on investment? What are the advantages and limitations of return i i e? s and limitations of residual incom dded compare to return on What are the advantage: How does the concept of economic valued a investment and residual income? , o examples Give two examples of financial performance measures and tw‘ P| of nonfinancial performance measures. . What are the six steps in designing accounting-based performance measures? “RI is not identical to ROI although both measures incorporate income and investment into their computations.” Do you agree? Explain. Describe EVA. . Give three definitions of investment used in practice when computing ROL. . Distinguish between measuring assets based on current cost and historical cost. What special problems arise when 7 ‘ nati evalu: multinational companies? ating performance in Performance measurement misunderstood, and most diffi critical performance indicato performance measurement? is Perhaps the most important, most cult task in management accounting. What TS are contained in an effective system ofUl. Exercises Exercise 1 (ROI and Residual Income) Consider the following data from Coral Financial, ‘Inc. Coral uses investment center evaluation to analyze its two main divisions — mortgage loans and consumer loans (in millions): Consumer Loans Mortgage Loans Total assets P2,000 10,000 Operating income P400 P1,500 25% 15% Return on investment Required: 1. Which division is more successful? Why? Coral uses residual income as a measure of management success. What is the residual income for each division if the minimum desired rate of return is (a) 11 percent, (b) 15 percent, (c) 17 percent? Which division is more successful under each of these rates? Exercise 2 (Return on Investment; Comparisons of Three Companies) Fill in the blanks for this information: Companies in the Same Industry A B c Sales P1,500,000 P 750,000 es Income .* 200,000 75,000 Investment (assets) 500,000 . 2,500,000 Retuyn on sales © 0.5% Asset;turnover —_— _— 15 eee 1% Return on investment Exercise 3 (ROI, RI, ROS, Management Incentives) The Jump-Start Division (JSD) of Magic Industries manufactures go-carts and other recreational vehicles. JSD is considering building a new plant in 2018. The investment will cost P2.5 million. The expected revenues and costs for the new plant in 2018 are:2,400,000 Revenues 00,000 Variable costs 1,120,000 Fixed costs P_480,000 Operating income 5 (ROS) is 19 percent. ROI F 1s. The bonus of Jayce ision ROI. JSD’s ROI in 2017 is 24% and its return on sa ; is defined as operating income divided by tole Tan, the division manager of JSD, is based on Required: .w plant. Show your 1g explain why Tan would be reluctant to build the new P! computations, 2. Suppose Magic Industries used RI to further that the required rate of return Explain. Would Tan be more willing to build the new plant? bai bonus. Would 3. Suppose Magic Industries used ROS to determine ooave the advantages Tan be more willing to build the new Pee + bonus? and disadvantages of using ROS to determine Tan determine Tan’s bonus. Suppose on investment 1s 15 percent. |. Problems Problem 1 (RI, EVA) The Lighthouse Transport Company operates two divisions, a Truck Rental Division that rents to individuals, and a Transportation Division that transports goods from one city to another, Results reported for the last year are as follows: Truck Rental Division _ Transportation Division Tofal assets P650,000 P950,000 Curfent liabilities 120,000 200,000 Operating income 75,000 160,000 Required: : 1. Calculate the RI for each division using oper ‘otal assets minus ou; stment is 12 percent, ating income and rate of return on inve: trent liabjlities. The required 2. The company has two sources of fi unds: value of P900,000 at an interest rate er ] market value of P600,000 at 4 cost of equi income tax rate is 40 Percent. Lightho * us long-term debt with a market 0% and equity capital with a ty of 15 percent. Lighthouse’s Se applies the same weighted-Financial and Nonfinancial Performance Measures 973 eka 86, COSt Of capital to both divisions, since each division faces similar risks. Calculate the EVA for each division 3. Using your answers to requirements | and 2, what would you conclude about the performance of each division? Explain briefly. Problem 2 (ROL, RI, Measurement of Assets) Hae scorporation recently announced a bonus plan to be awarded to the choose hens Roi Profitable division. The three division managers are to errmnat af Ol or RI will be used to measure profitability. In addition, value “cide whether investment will be measured using gross book ; OF net book value of assets, Park defines income as operating income and ivestment as total assets, The following information is available for the year just ended: o Gross Book Accumulated Division Division Value of Assets Depreciation __ Operating Income s 800,000 P430,000 P94,700 P 760,000 410,000 91,700 F 500,000 280,000 61,400 Park uses a required rate of return of 10% on investment to calculate RI. Required: . Each division manager has selected a method of bonus calculation that ranks his or her division Number 1, Identify the method for calculating profitability that each manager selected, supporting your answer with appropriate calculations. Problem 3 (Multinational Performance Measurement, ROI, RI) , : ree The Angeles Corporation manufactures electric motors in the Philippines and . The Philippine and Swedish operations are " organize ais divisions. The following information is available for 2013 where ROI is calculated as operating income divided by total assets: Philippine Division Suri Division C 2 9,180, onas Operosing inva P8,000,000 60,000,000 kronas Total assets a ; ROI974 Chapter 23 TT The exchange rate at the time of Angeles’ investment 10 Sas December 31, 2017 was 8 kronas = PI. During 2018 the Swes'shy None declined steadily in value so that the exchange rate on oa Hs aes are 9 kronas = PI. The average exchange rate during 2013 is (( . , kronas = PI. Required: — 1. a. Calculate the Philippine division's operating ine b. Calculate the Swedish division’s ROI for 2018 i 2. Senior management wants to know which Cee 2018. What would you tell them? Explain your . 2 i 3. Which division do you think had the better RI Pe ee your answer. The required rate of return on investme! Phil. peso) is 12 percent. income for 2018 in kronas- arned a better ROI in Problem 4 (ROI Performance Measures Based on Historical Cost and Current Cost) Sparkling Mineral Water Ltd. operates three divisions that process and bottle sparkling mineral water. The historical-cost accounting system reports the following information for 2018: Luzon Visayas Mindanao Division Division Division Revenues ° P500,000 P_700,000 P1,100,000 Operating costs (excluding depreciation) 300,000 380,000 600,000 Plant depreciation 70,000 100,000 120,000 Operating income P130,000 P_220,000 P_380,000 Current assets P200,000 250,000 P 300,000 Longeterm assets — plant 140,000 900,000 1,320,000 cae £340,000 1,150,000 P1,620,000 Sparkling Mineral Waters estimat . : les the use: years with a zero terminal disposal ful life of each plant to be 12 ea Price. The straight-line depreciation = Dee At the end of 2018, the Luzon plan 10 cars old, the Plant is 3 years old, and the Mindanao plant is | year old An index of constructio, ; mn Waters has been open Costs for the 10-year period that Sparkling Mineral Ng (2008 year-end = 100) is:2008 409 2017 2018 Given the high " .e " historical rover of -Cost a Current assets, | i eit and current-cost eee management believes that the current assets are approximatel: y Required: 1. Compute th - te the ROI r, , using historical. atio (operating income to total assets) of each division Cost n 2. Compute the ROT of each res, Comment on the results. division, incorporating current-cost estimates as of 2018 fo r iati results. depreciation and long-term assets. Comment on the 3. What adv antages mi. : compared with Reece from using current-cost asset measures as of the “cost measures fi i Managers of the three divisions? for evaluating the performance. IV. Multiple Choice 1. A report : : a ie a ed oe financial and nonfinancial performance us Organization units in a single rey i a. balanced scorecard. ° Ble report is called a) b. financial report scorecard. c. imbalanced scorecard. d. unbalanced scorecard. 2. Customer-satisfaction measures are an example of: a. .' Goal-congruence approach. b. _ balanced scorecard approach. c. _ financial report scorecard approach. d. investment success approach. 3. Anexample of a performance measure with a long-run time horizon a. _ is direct materials efficiency variances. is overhead spending variances. is number of new patents developed. b. c. d. include all of the above measures...Should assets be defined as total assets or net assets? This question is considered part of which step in designing an accounting-based performance measure? ; / . a. Choose performance measures that align with top management’s financial goals. Choose the time horizon of each performance measure. c. Choose a definition for each performance measure. d. Choose a measurement alternative for each performance measure. or current cost? This i i t . Should assets be measured at historical cost ounting- question is considered part of which step in designing an acc based performance measure? ; a. Choose performance measures that align with top management's financial goals. b. Choose the time horizon of each performance measure. c. Choose a definition for each performance measure. d. Choose a measurement alternative for each performance measure. Which of the following statements about designing an accounting- based performance measure is false? a. The steps may be followed in a random order. b. The issues considered in each step are independent. c. Management's beliefs are present during the analyses. d. Behavioral criteria are important when evaluating the steps. The return on investment is usually considered the most popular approach to incorporating the investment base into a performance measure because a. it blends all the ingredients of profitability into a single percentage. b. eS there is no need to use it with other measures of c. it is similar to the company’ i i ; n y’s price earnin io i corporation’s return on i See Street Journal. hvesiment appears every day in The Wall d. of both (a) and (c). ; During the Past twelve months, the Seven income of P39,209, What is the return on inv ceearatlon had wet the investment is P280,0007 estment if the amount of a. % _— b. 12% c 14% a. 16%_Financial and ‘Nonfinancial Performance Measures 977 9. The Delta Corporation had the following information for 2018: Revenue P 900,000 Operating expenses 670,000 Total assets- 13150,000 What is the return on investment? a 10% b. 20% cC. 25% d. 78.2% The following information applies to questions 10 through 12. The HZL Corporation reported the following information for its Pasig Division: Revenues . P1,000,000 Operating costs . 600,000 Taxable income 200,000 Operating assets 500,000 Income is defined as operating income. 10. What is the Pasig Division’s investment turnover ratio? a. 2.00 b. 3.33 ce 2.50 d. 0.80 11; What is the Pasig Division’s return on sales? , a. 0.2 b. 0.4 ce 05 d. 0.6 ig Division’: on investment? 12. What is the Pasig Division’s return a 0.2 ' b. 04 c. 0.5 d. 08978 Chapter 23 _ Chapter 23 = 13. A problem with utilizing residual income is that ge ratio always has a a. b. C. d. 14. A company which favors the residual inco! a b. c. d. @ corporation with a high investment turr eaiiee higher residual income than a corpo! : investment turnover ratio. les always has a higher a corporation with a high return on sales A000 on sales, residual income than a corporation with a pease is likely to have a corporation with a larger peso amount acts with a smaller peso a higher residual income than a corporati amount of assets. none of the above are correct. ration with roach me oP mizing an absolute maxi wants managers to concentrate on amount of pesos. jmizing a percentage wants managers to concentrate on maximizing return. i i ver ratio. wants managers to maximize the investment turno wants managers to maximize return on sales. The following information applies to questions 15 through 17. i isi that operate The Globe Medical Supply Company has two divisions independently of one another. The financial data for the year 2018 reported the following results; Uptown Downtown Sales 3,000,000 P2,500,000 Operating income 750,000 550,000 Taxable income 650,000 375,000 Investment 6,000,000 5,000,000 The company’s desired rate of return is 10%. Income is defined as Operating income. 15. What are the respect i pective return-on-invest i and Downtown Divisions? Oe Ser the Nowe = aos 0.110 and 0.125 0.108 and 0.075 0.125 and 0.110 0.050 and 0.150Finan ad Nonfinancial P, é "financial erformance Measures 979 16. What are the reg ective residual in 16 What aro oe cree lal incomes for the Uptown and 2 P30,000 and PS0,000 P1S0,000 and P30,000 ¢ P!50,000 and P50,000 4. PS0,000 anda Negative P150,000 17. Which division has the best return on investment and which division has the best residual income figure, respectively? a Ptown, Uptown Downtown, Downtown c, Uptown, Downtown d. Downtown, Uptown 18, - . , A ny eative feature of defining investment by excluding the portion of ‘ assets employed that are financed by short-term creditors is + age liabilities are sometimes difficult to define. Short-term debt is always more expensive to finance than long- term debt. this method encourages managers to use an excessive amount of short-term debt. d. this method encourages managers to use an excessive amount of long-term debt, The. Sollowing information applies to questions 19 through 2], Federov Company has two sources of funds: long-term debt with a market and book value of P10 million issued at an interest rate of 12%, and equity capital that has a market value of P8 million (book value of P4 million), following locations with the Feterov Company has profit centers in the and total liabilities. The cost of folfowing Operating incomes, total assets, equity capital is 12%, while the tax rate is 25%. i Current ae Assets Liabilities Tarl P 960,000 P 4,000,000 P 200,000 vezon P1,200,000 P 8,000,000 P 600,000 een 2,040,000 P12,000,000 P1,200,000 Manila20. What is the EVA for Quezon? a P135,580 b. P220,000 c. P234,000 d. P305,000 21. What is the EVA for Manila? a. P 450,000 b. P1,530,000 ec. P 414,360 d. PI,115,640 The following information applies to questions 22 through 24. P. Jones Cleaning Products manufactures home cleaning products. The company has two divisions. Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2013: Assets Income Book Current Book Current value value value value P225,000 P300,000 P150,000 —_-P155,000 Bleach P450,000 P250,000 P100,000 P105,000 Cleanser ? The company is currently using a 15% required rate of return. What are Bleach’s and Cleanser’s return on investment based on book values, respectively? 0.22; 0.67 b. 0.42: 0.52 c. 0.52; 0.42 d. 0.67; 0.22 22. »24. 25. 26. current values a 0.22; 0.67 b. 0.42: 0.59 c. 0.52; 0.49 4. 0.67; 0.23 What are Blea values, respecti ch’ vely2 Cleanser’s residual incomes based on book a. . P116,25 > 32,500 67,500 P110,000 4. P 37,500: py 16,250 If a company ; . different ine multinational company with operations in several based on ROIs f ene. way to achieve comparability of historical-cost a. restate the ee in different countries is Operati i accounting, erations using the cash basis method of b._Use GAAP for all reporting and calculations c. — restate the results of all operations in pesos. d. all of the above would achieve comparability. Which of the following statements is true? a. The economic, legal, political, social and cultural environments differ across countries. Governments in some countries may impose controls and limit selling prices of a company’s products. ; Because of advances in telecommunications and transportation, a : " the availability of materials and skilled labor does not differ b. significantly across countries. d. Both (a) and (b) are correct. . . . mance measures more closely to a manager's effort he use of nonfinancial measures. financial ratios. ; _ t of compensation dominating the Tying perfo! a. encourages tl " i ict use 0 b. _ results in a strict i c. results in the salary componen , ensation package. total comp’ y and (0) includes both (ay oe 29. 30. 31. , 32. Team incentives encou a rage cooperation by forcing F People to work tog . ; improving morale. ogether on difficult tasks. letting individuals common goal. help one another as they strive toward a rewarding all teams the same amount. c. d. Many manufacturing, marketing, and design problems require employees with multiple skills; therefore, teams are used and the members have the added encouragement of individual incentives. management incentives. morale incentives. team incentives. aos Designers of executive. compensation plans emphasize which of the following factors? a. Achievement of organizational goals b. Administrative case 5 c. The probability that the executives affected by the plan will perceive the plan as fair d. All of the above are emphasized. ber of customers are two examples of Rate of sales growth and num for which of the following critical critical. performance indicators success factors? . a. Service b. Quality c, Cost d. Revenue An effective system of performance measurement contains critical performance indieators that are a reflection of the customer's perspective, a reflection of the customer’s validation, a reflection of comprehensive information, and a provision for feedback. What critical performance indicator is described by the following statement?33. 34. 35. Customer-foe 2 yer munce Measures 983, used ma ; erfo mage acti eTTONmANEE MeasUEES help organiza Matters to the custor, concentrating their attention o; ization members ners. 0 improving whi at a. Reflecti e 5 5 Rene of the customer's perspective ‘ Refenen of the customer's validation ‘. n of comprehensive information Provision of feedback An effecti tive syst em of erfor syst performances i pe mance indicators th ‘© measurement contains critical Perspective, a reflect at are a reflection of the customer's comprehensive ia ion of the customer’s validation, a reflection of ‘Ormation, and a provision for feedback. What critic al pei saa: 5 statement? Performance indicator is described by the following Performance m should reflect whan should be external, rather than internal and lerstanding of the difference between the and outcome of activities. . oe a. Reflection of the customer’s perspective b. Reflection of the customer’s validation c. Reflection of comprehensive information d. Provision of feedback When a firm discovers that sales have been declining because of poor service and slow delivery schedules, they are receiving a(n): a. diagnostic signal. b. warning signal. c. supporting signal. d. “green light” signal. measurement contains critical re a reflection of the customer's stomer’s validation, @ reflection of for feedback. An effective system of performance performance indicators that 4 perspective. a reflection of the cus mer comprehensive information, and a pro is i » the following ‘tical performance indicator 1s described by What critica statement?984 36. 37. __ Chapter 23 Se We ~ a curement assesses all facets An effective program of performance me er pe aitioraade se of relevant performance so thal the dee mance for performance on relevant, but unmeasured, facets of per measured facets. ji , ive a. Reflection of the customer's Re c! i the customer’s val} ; Reflection of formation b. c. Reflection of comprehensive in! d. Provision of feedback e measurement contains critical reflection of the customer’s mer’s validation, a reflection of for feedback. An effective system of performanc performance indicators that are @ perspective, a reflection of the customer comprehensive information, and a provision i 2 nce indicator is concerned with outcomes ¢ What critical performat : Reflection of the customer’s perspective a. C b. Reflection of the customer’s validation c. © Reflection of comprehensive information d. Provision of feedback An effective system of performance measurement contains critical performance indicators that are a reflection of the customer’s perspective, a reflection of the customer’s validation, a reflection of comprehensive information, and a provision for feedback. What critical performance indicator uses performance measures as warning and diagnostic signals? a. © Reflection of the customer’s perspective b. Reflection of the customer’s validation ‘c. Reflection of comprehensive information d.. Provision of feedback