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Chapters 1-4 The Accounting Cycle
Chapters 5-8 Current Assets
Chapters 9-11 Long-Term Assets
Chapters 12-14 Liabilities/Equities
Chapters 15-16 Using Information
- Chapter 15: Financial Reporting and Concepts
- Chapter 16: Financial Analysis and the Statement of Cash Flows
Chapters 17-20 Managerial/Cost
Chapters 21-24 Budgeting/Decisions

Chapter 24 - Multiple Choice

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Question 1 of 10

1. Question
Which of the following statements regarding relevant costs and sunk costs is incorrect?
- A serious drawback associated with the incremental approach of relevant cost study is that the incremental approach is cumbersome if more than two alternatives are considered.
- The type of cost presented to management for an equipment replacement decision should be limited to relevant costs.
- A sunk cost is a cost which cannot be avoided because it has already been incurred.
- Relevant costs can be studied using an incremental approach but should not be considered with a full project approach.
Correct

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Question 2 of 10

2. Question
Deep Channel Ferry Company is evaluating whether to purchase a more fuel-efficient boat or continue to use the boat they currently own. Both boats are identical except for the engine. The fuel-efficient boat costs $620,000, has an estimated service life of five years, has no salvage value, and will have variable operating costs of $100,000 per year. The boat currently owned had an original cost of $320,000, has an existing book value of $160,000, has an estimated remaining service life of five years, has no salvage value at the end of its service life, has a current disposal value (now) of $120,000, and has variable operating costs of $200,000 per year. Ignoring present value and tax considerations, what should Deep Channel do?
- Buy the fuel-efficient boat.
- Keep the existing boat.
- Be indifferent between the fuel-efficient boat and the existing boat.
- Cannot be determined.
Correct

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Question 3 of 10

3. Question
The effect on a company’s operating income of discontinuing a department with a contribution margin of $8,000 and allocated overhead of $16,000 (of which $7,000 cannot be eliminated) would be to:
- Decrease operating income by $1,000.
- Decrease operating income by $9,000.
- Increase operating income by $1,000.
- Increase operating income by $8,000.
Correct

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Question 4 of 10

4. Question
Lansing Department Store provided information regarding three departments:

Assuming the trends in costs and revenues continue, which department should be discontinued?
- A only
- B only
- C only
- More than one department should be discontinued.
Correct

Incorrect
Question 5 of 10

5. Question
Which of the following statements regarding capital budgeting decisions is incorrect?
- Capital budgeting analysis techniques are applicable to equipment replacement decisions.
- The amount and timing of cash flows is critical to the calculation of the net present value of an investment.
- The cost of capital is equal to a company's maximum desired rate of return.
- In a capital budgeting decision, the amount of the initial investment required is critical to the analysis; it is not treated as a sunk cost.
Correct

Incorrect
Question 6 of 10

6. Question
Analyze the following statements regarding capital budgeting decisions and determine which is correct.
- The net present value of decision making and capital budgeting is superior to the payback method in that it considers the time value of money.
- Assuming a 6% interest rate, the factor 0.94340 would be taken from a compound interest (future value) table of factors.
- The internal rate of return capital budgeting technique does not consider the time value of money.
- All capital budgeting techniques will produce the same decision in selecting among alternatives.
Correct

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Question 7 of 10

7. Question
Michaels, Inc., purchased a machine for $100,000. The machine has a useful life of five years and no salvage value. Straight-line depreciation is to be used. The machine is expected to generate cash flow from operations, net of income taxes, of $30,000 in each of the five years. Michaels’ expected rate of return is 10%. Information on present value factors is as follows:

Period

Present value of $1 at 10%

Present value of ordinary annuity of $1 at 10%

1

0.90909

0.90909

2

0.82645

1.73554

3

0.75132

2.48685

4

0.68301

3.16986

5

0.62092

3.79079

What would be the net present value?
- $6,862.
- $13,724.
- $50,000.
- $62,092.
Correct

Incorrect
Question 8 of 10

8. Question
Birmingham Manufacturing purchased a new machine for $100,000. The machine will last ten years and is to be depreciated by the straight-line method. The estimated salvage value of the machine is zero. The machine should generate a yearly cash inflow of $25,000. What is the accounting rate of return on this investment ignoring income taxes?
- 5%
- 15%
- 25%
- 35%
Correct

Incorrect
Question 9 of 10

9. Question
Depreciation is incorporated into the discounted cash flow analysis of an investment proposal because it:
- Is a cost of operations which cannot be avoided.
- Results in an annual cash outflow.
- Is a cash inflow.
- Reduces the cash outlay for income taxes.
Correct

Incorrect
Question 10 of 10

10. Question
Fleming Company is considering the purchase of a new machine. The machine cost $200,000 and will generate yearly cash inflow of $30,000. What is the payback period?
- 4 years and 8 months.
- 6 years and 8 months.
- 6 years and 9 months.
- 15 years.
Correct

Incorrect

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Chapters 1-4
Chapters 5-8
Chapters 9-11
Chapters 12-14
Chapters 15-16
- Chapter 15: Financial Reporting and Concepts
- Chapter 16: Financial Analysis and the Statement of Cash Flows
Chapters 17-20
Chapters 21-24
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