TEST BANK FOR ACCOUNTING PRINCIPLES CHAPTER 26

TEST BANK FOR ACCOUNTING PRINCIPLES CHAPTER 26 INCREMENTAL ANALYSIS AND CAPITAL BUDGETING SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Ite LO BT Ite LO BT Ite LO BT Item LO BT Item LO BT True-False Statements 1. 1 2. 2 3. 2 4. 2 5. 2 6. 2 7. 3 8. 3 K K C K K C C C 9. 3 10. 4 11. 4 12. 4 13. 5 14. 5 15. 6 16. 6 C C K C C C C C 17. 6 18. 7 19. 7 20. 8 21. 8 22. 9 23. 9 24. 9 C C C C C C K K 25. 9 26. 9 27. 9 28. 10 29. 10 30. 10 sg31. 1 sg32. 2 K C C C C K K K sg33. 3 sg34. 5 sg35. 7 sg36. 9 sg37. 10 C K C K K Multiple Choice Questions 38. 1 39. 1 40. 1 41. 1 42. 2 43. 2 44. 2 45. 2 46. 2 47. 2 48. 2 49. 2 50. 2 51. 2 52. 2 53. 3 54. 3 55. 3 56. 3 57. 3 58. 3 59. 3 60. 3 61. 3 62. 3 63. 4 K K K K K C K C C K K C C C C AN AN C C C C C C AP AP K 64. 4 65. 4 66. 4 67. 4 68. 4 69. 4 70. 4 71. 4 72. 4 73. 4 74. 4 75. 4 76. 4 77. 4 78. 4 79. 5 80. 5 81. 5 82. 5 83. 5 84. 5 85. 5 86. 5 87. 4 88. 5 89. 5 K C C C C AN AN AN AN AN AN AN AN AN AP AN AN AN AN AP AN C AN AP C AN 90. 6 91. 6 92. 6 93. 6 94. 6 95. 6 96. 6 97. 6 98. 6 99. 7 100. 7 101. 7 102. 7 103. 7 104. 7 105. 8 106. 8 107. 8 108. 8 109. 8 110. 9 111. 9 112. 9 113. 9 114. 9 115. 9 C C C C C C C AP AP AN AN C AN C AN AN AN C AN AN AP AP AP K K C 116. 9 117. 9 118. 9 119. 9 120. 9 121. 9 122. 9 123. 9 124. 9 125. 9 126. 9 127. 9 128. 9 129. 10 130. 9 131. 9 132. 10 133. 9 134. 9 135. 10 136. 10 137. 10 138. 10 139. 10 140. 10 141. 10 AP C AP K K K C K AP K C AP C K AP AP AP AP AP AP AP AP AP AP AP AP 142. 10 143. 10 144. 10 145. 10 146. 10 147. 10 148. 10 149. 10 150. 10 151. 10 152. 10 st153. 1 sg154. 3 st155. 4 sg156. 4 sg157. 6 sg158. 7 st159. 7 st160. 8 st161. 9 sg162. 9 sg163. 9 st164. 10 sg165. 10 AP K C AN AN AP AP AP AP C C K AN K C K C K AP K K K K K Brief Exercises 166. 2 167. 3 168. 4 AP AP AP 169. 4 170. 5 171. 6 AP AN AN 172. 7 173. 8 174. 9 AP AN AP 175. 9 176. 10 177. 10 AP AP AP sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Exercises 178. 3 179. 3 180. 3 181. 3 182. 3,4 183. 4 AN AN E E AP E 184. 4 185. 4 186. 5 187. 5 188. 5 189. 6 AP AN E AP E AN 190. 6 191. 7 192. 7 193. 7 194. 7 195. 8 E AP E AP E E 196. 8 197. 9 198. 9 199. 9 200. 9,10 201. 9,10 AP AP AP AP E AP 202. 10 203. 10 204. 10 205. 10 AP E E AP Completion Statements 206. 1 207. 2 208. 3 K K K 209. 4 210. 5 211. 6 K K K 212. 8 213. 9 214. 9 K K K 215. 9 216. 9 217. 10 K K K 218. 10 219. 10 220. 10 K K K Matching 221. 6 K Short-Answer Essay 222. 4 K 224. 4 K 226. 9 K 223. 10 K 225. 9 K 227. 6 K SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Ite Typ Item Typ Item Typ Item Typ Item Typ Item Typ Item Typ Learning Objective 1 1. TF 31. TF 38. MC39. MC 40. MC41. MC 153. MC 206. C Learning Objective 2 2. TF 3. TF4. TF 5. TF 6. TF 32. TF 42. MC 43. MC44. MC 45. MC 46. MC47. MC 48. MC 49. MC50. MC 51. MC 52. MC 166. BE 207. C Learning Objective 3 7. TF 8. TF 9. TF 33. TF 53. MC 54. MC 55. MC56. MC 57. MC 58. MC 59. MC60. MC 61. MC 62. MC 154. MC 167. BE 178. Ex 179. Ex 180. Ex181. Ex 182. Ex 208. C Learning Objective 4 10. TF 11. TF 12. TF 63. MC64. MC 65. MC 66. MC 67. MC 68. MC69. MC 70. MC 71. MC 72. MC 73. MC74. MC 75. MC 76. MC 77. MC 78. MC 87. MC 155. MC 156. MC 168. BE 169. BE 182. Ex 183. Ex 184. Ex 185. Ex 209. C 222. SA 224. SA Learning Objective 5 13. TF 14. TF 34. TF 79. MC 80. MC81. MC 82. MC 83. MC84. MC 85. MC 86. MC 88. MC 89. MC 170. BE 186. Ex 187. Ex 188. Ex 210. C Learning Objective 6 15. TF 16. TF17. TF 90. MC 91. MC92. MC 93. MC 94. MC95. MC 96. MC 97. MC98. MC 157. MC 171. BE 189. Ex 190. Ex 211. C 221. MA 227. SA Learning Objective 7 18. TF 19. TF 35. TF 99. MC 100. MC101. MC 102. MC 103. MC104. MC 158. MC 159. MC 172. BE 191. Ex 192. Ex193. Ex 194. Ex Learning Objective 8 20. TF21. TF 105. MC106. MC 107. MC108. MC 109. MC 160. MC 173. BE 195. Ex 196. Ex 212. C Learning Objective 9 22. TF 23. TF 24. TF 25. TF 26. TF 27. TF 36. TF 110. MC 111. MC 112. MC 113. MC 114. MC 115. MC116. MC 117. MC 118. MC 119. MC 120. MC 121. MC 122. MC123. MC 124. MC 125. MC 126. MC 127. MC 128. MC 130. MC131. MC 133. MC 134. MC 161. MC 162. MC 163. MC 174. BE175. BE 197. Ex 198. Ex 199. Ex 200. Ex 201. Ex213. C214. C 215. C 216. C 225. SA226. SA Learning Objective 10 28. TF 29. TF 30. TF 37. TF 129. MC 132. MC 135. MC 136. MC 137. MC 138. MC 139. MC140. MC 141. MC 142. MC 143. MC 144. MC 145. MC146. MC 147. MC 148. MC 149. MC 150. MC 151. MC152. MC 164. MC 165. MC 176. BE 177. BE 200. Ex201. EX 202. Ex 203. Ex 204. Ex 205. Ex217. C218. C 219. C 220. C 223. SA Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise SA = Short-Answer MA = Matching CHAPTER LEARNING OBJECTIVES 1. Identify the steps in management's decision-making process. Management's decision- making process is (a) identify the problem and assign responsibility (b) determine and evaluate possible courses of action, (c) make the decision, and (d) review the results of the decision. 2. Describe the concept of incremental analysis. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives. 3. Identify the relevant costs in accepting an order at a special price. The relevant information in accepting an order at a special price is the difference between the variable costs to produce the special order and expected revenues. 4. Identify the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved, (b) the purchase price, and (c) opportunity costs. 5. Identify the relevant costs in determining whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. 6. Identify the relevant costs to be considered in repairing, retaining or replacing equipment. The factors to consider in determining whether equipment should be retained or replaced are the effects on variable costs and the cost of the new equipment. Also, any trade-in allowance or cash disposal value of the existing asset must be considered. 7. Identify the relevant costs in deciding whether to eliminate an unprofitable segment or product. In deciding whether to eliminate an unprofitable segment, determine the contribution margin, if any, produced by the segment and the disposition of the segment's fixed expenses. 8. Determine which products to make and sell when resources are limited. When a company has limited resources, find the contribution margin per unit of limited resource. Then multiply this amount by the units of limited resource to determine which product maximizes net income. 9. Contrast annual rate of return and cash payback in capital budgeting. The annual rate of return is obtained by dividing expected annual net income by the average investment. The higher the rate of return, the more attractive the investment. The cash payback technique identifies the time period to recover the cost of the investment. The formula is: Cost of capital expenditure divided by estimated net annual cash flow equals cash payback period. The shorter the payback period, the more attractive the investment. 10. Distinguish between the net present value and internal rate of return methods. Under the net present value method, compare the present value of future net cash flows with the capital investment to determine net present value. The NPV decision rule is: Accept the project if net present value is zero or positive. Reject the investment if net present value is negative. Under the internal rate of return method, find the interest yield of the potential investment. The IRR decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return. Reject the project when the internal rate of return is less than the required rate. TRUE-FALSE STATEMENTS 1. An important step in management's decision-making process is to determine and evaluate possible courses of action. Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning 2. In making decisions, management ordinarily considers both financial and nonfinancial information. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning 3. In incremental analysis, total variable costs will always change under alternative courses of action, and total fixed costs will always remain constant. Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 4. Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives. Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Decision Analysis 5. Decision-making involves choosing among alternative courses of action. Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 6. Financial data are developed for a course of action under an incremental basis and then it is compared to data developed under a differential basis before a decision is made. Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 7. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost. Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 8. If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 9. A company should never accept an order for its product at less than its regular sales price. Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 10. A decision whether to continue to make a product or buy it externally, depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources. Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Quantitative Methods 11. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action. Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always make the decision to choose the lowest cost alternative. Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 13. In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 14. It is always better to sell now rather than process further because of the time value of money. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics 15. In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered a sunk cost. Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 16. In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis. Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 17. It is better not to replace old equipment if it is not fully depreciated. Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 18. From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated. Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 19. The elimination of an unprofitable product line may adversely affect the remaining product lines. Ans: T, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics 20. When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit of limited resource. Ans: T, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 21. If a company has only a certain number of machine hours available for production, it is generally more profitable to produce and sell the product with the highest unit contribution margin. Ans: F, LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 22. Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability. Ans: T, LO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Investment Decisions