Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 131:

  When employing the MACRS method of depreciation in a capital budgeting decision, the use of MACRS as compared to the straight-line method of depreciation will result in:

  A. Equal total depreciation for both methods.

  B. MACRS producing less total depreciation than straight line.

  C. Equal total tax payments, after discounting for the time value of money.

  D. MACRS producing more total depreciation than straight line.

  Correct Answer: A

  Choice "a" is correct. MACRS and straight line depreciation will be equal in total (only the timing differs).

  Choices "b" and "d" are incorrect, per above.

  Choice "c" is incorrect. The timing of the depreciation tax shields will differ. The discounting will result in

  different present values based on the differing timing.

• Question 132:

  The annual tax depreciation expense on an asset reduces income taxes by an amount equal to:

  A. The firm's average tax rate times the depreciation amount.

  B. One minus the firm's average tax rate times the depreciation amount.

  C. The firm's marginal tax rate times the depreciation amount.

  D. One minus the firm's marginal tax rate times the depreciation amount.

  Correct Answer: C

  Choice "c" is correct. The annual tax depreciation expense reduces income taxes by an amount equal to the firm's marginal tax rate (the tax on the next dollar of income) times the depreciation amount. Choices "a", "b", and "d" are incorrect, per above.

• Question 133:

  An example of an indirect cash flow effect would be:

  A. Cash committed at inception of the project.

  B. Increased payroll expenses due to the project.

  C. A depreciation tax shield.

  D. An increase in expected future operating cash flows.

  Correct Answer: C

  Choice "c" is correct. A depreciation tax shield is one of the most common indirect cash flow effects. Choices "a", "b", and "d" are incorrect, as these are all directly related to the capital investment and have an immediate effect on the amount of cash available to the company. Thus, they are all direct cash flow effects.

• Question 134:

  Capital budgeting decisions include all but which of the following?

  A. Selecting among long-term investment alternatives.

  B. Financing short-term working capital needs.

  C. Making investments that produce returns over a long period of time.

  D. Financing large expenditures.

  Correct Answer: B

  Choice "b" is correct. Capital budgeting decisions do not include the financing of short-term working capital

  needs, which are more operational in nature.

  Choices "a", "c", and "d" are incorrect, as these are all types of capital budgeting decisions.

• Question 135:

  The relevance of a particular cost to a decision is determined by:

  A. Riskiness of the decision.

  B. Number of decision variables.

  C. Potential effect on the decision.

  D. Accuracy of the cost.

  Correct Answer: C

  Choice "c" is correct. The relevance of a particular cost to a decision is determined by potential effect on

  the decision. Relevant costs are expected future costs that vary with the action taken. All other costs are

  assumed to be constant and thus have no effect on the decision.

  The relevance of a particular cost to a decision is not determined by:

  A. Riskiness of the decision.

  B. Number of decision variables.

  D. Accuracy of the cost.

• Question 136:

  In a decision analysis situation, which one of the following costs is generally not relevant to the decision?

  A. Incremental cost.

  B. Avoidable cost.

  C. Historical cost.

  D. Opportunity cost.

  Correct Answer: C

  Choice "c" is correct. Historical cost is generally not relevant in a decision analysis situation. All of the following costs are relevant in a decision analysis situation:

  A. Incremental cost

  B. Avoidable cost

  D. Opportunity cost

• Question 137:

  Companies that adopt just-in-time purchasing systems often experience:

  A. A reduction in the number of suppliers.

  B. Fewer deliveries from suppliers.

  C. A greater need for inspection of goods as the goods arrive.

  D. Less need for linkage with a vendor's computerized order entry system.

  Correct Answer: A

  Choice "a" is correct. Just-in-time purchasing systems usually results in a reduction in the number of

  suppliers. Because a company that adopts J-I-T is very dependent on supplier performance, usually fewer

  suppliers are used and a very close working relationship is developed.

  Choice "b" is incorrect. Just-in-time requires more deliveries from suppliers.

  Choice "c" is incorrect. Usually there is more reliance on quality control by the supplier. Finding defective

  goods as they arrive is too late; a stock-out could cause production to shut down. Choice "d" is incorrect.

  There is much more need for linkage with the vendor's order entry system with JI- T because the company

  is dependent on timely deliveries from the vendor.

• Question 138:

  Management accountants are frequently asked to analyze various decision situations including the following.

  I. The cost of a special device that is necessary if a special order is accepted.

  II. The cost proposed annually for the plant service for the grounds at corporate headquarters.

  III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.

  IV.

  The costs associated with alternative uses of plant space, to be considered in a make/buy decision.

  V.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus disposal decision.

  The cost described in situation II above is a:

  A. Prime cost.

  B. Sunk cost.

  C. Discretionary cost.

  D. Relevant cost.

  Correct Answer: C

  Choice "c" is correct. Discretionary cost. The proposed cost for plant service for the grounds at corporate

  headquarters is an example of an avoidable cost that is discretionary.

  Choice "a" is incorrect. Prime costs are direct materials and direct labor.

  Choice "b" is incorrect. Sunk costs are costs previously incurred and not relevant.

  Choice "d" is incorrect. Relevant costs are expected future costs that vary with the action taken.

• Question 139:

  Management accountants are frequently asked to analyze various decision situations including the following.

  I. The cost of a special device that is necessary if a special order is accepted.

  II. The cost proposed annually for the plant service for the grounds at corporate headquarters.

  III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.

  IV.

  The costs associated with alternative uses of plant space, to be considered in a make/buy decision.

  V.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus disposal decision.

  The costs described in situations I and IV above are:

  A. Prime costs.

  B. Sunk costs.

  C. Discretionary costs.

  D. Relevant costs.

  Correct Answer: D

  Choice "d" is correct. Relevant costs.

  Both I and IV are costs that are relevant to a decision.

  Choice "a" is incorrect. Prime costs include direct material and direct labor.

  Choice "b" is incorrect. Sunk costs are costs previously incurred and not relevant to decision-making.

  Choice "c" is incorrect. Discretionary costs are discretionary. In I, the special device is necessary.

• Question 140:

  Managers are often engaged in decision-making. There are numerous logical steps to reach a decision. The step least likely to used by a manager for decision-making would be:

  A. Obtaining information.

  B. Establishment of a strategic vision.

  C. Selecting alternatives.

  D. Identifying alternative courses of action.

  Correct Answer: B

  Choice "b" is correct. Establishing a strategic vision is not normally included as part of the logical steps to reach a decision. Although decision-making techniques are incorporated as part of establishing a strategic vision and consideration of strategic issues is important, the process of deriving the vision is not considered part of the decision-making process. Choice "a" is incorrect. Obtaining information as a basis for selecting between alternatives is generally viewed as a critical part of decision-making. Choice "c" is incorrect. Selecting alternatives is a specific decision-making action that is generally included as one of the steps identified in decision-making. Choice "d" is incorrect. Identifying alternative courses of action from which to choose is a decision-making process that is generally included as one of the steps identified in decision-making.