Principles of Accounting: Chapter Twenty-Four

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Chapter 24 examines analytical methods and reasoning that are applicable to management decision-making activities. The chapter begins with a presentation of cost characteristics, including emphasis on the concepts of relevant and sunk costs. This is followed by the construction of a general frame of reference for decision making, which is then illustrated with examples related to outsourcing, special orders, and discontinuance of products/departments.

The chapter then turns to consideration of the evaluation of capital expenditures. Such decisions are heavily dependent upon a number of intrinsic calculations related to future and present value concepts, and the chapter provides in-depth coverage of each. Next, the chapter shows how these considerations are utilized in net present value calculations and internal rate of return calculations. Alternative capital investment evaluation tools, like the accounting rate of return and payback method, are also examined.

Exercises

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Problems
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Multiple Choice
Objectives
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Fill in the Blanks: Chapter Twenty-Four

1. Future costs that differ among alternative courses of action are known as ____________ relevant costs.

2. ____________ Sunkcosts are irrelevant in decision making.

3. ____________Outsourcing means that a company has decided to acquire its goods from outside vendors rather than produce the same goods or services in-house.

4. The cost of a foregone alternative is termed ____________opportunity cost.

5. The selling price minus all variable costs is termed the ____________contribution margin.

6. Expenditures related to programs and projects that influence financial performance of multiple accounting periods are termed ____________ capitalexpenditures.

7. The concept which relates to a dollar in hand being worth more than a dollar in the future is called the ____________time value of money.

8. Future value concepts relate to ____________compound interest, wherein interest is computed on principal plus previously computed interest.

9. ____________Discounting is the name often given to the process of calculating the present value of future cash receipts.

10. Multiple level cash flows are termed ____________annuities .

11. The ____________ net present valuemethod requires the present value of an investment's cash inflows to be netted against the present value of the cash outflows.

12. The ____________ accounting rate of returnfocuses on the average income generated by a project in relation to the project's initial investment outlay.

13. ____________Internal rate of return is a capital budgeting tool which computes the interest rate necessary to equate cash inflows and cash outflows.

14. The ____________payback method is simple, yet it ignores the time value of money and cash flows which occur beyond a designated period of time.