Chapter 14 Test Bank Answers Performance Measurement

Testbank

to accompany

Accounting: business reporting for decision making

7th edition

by

Birt et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2020

Chapter 14: Performance measurement

Learning objectives

1. Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

Q1, Q2, Q3, Q4, Q5, Q6, Q7, Q8, Q9, Q51, Q52

2. Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17, Q53

3. Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

Q18, Q19, Q20, Q21, Q22, Q23, Q24, Q25, Q26, Q27, Q28, Q29, Q30, Q31, Q32, Q33, Q34, Q35, Q36, Q54, Q55, Q56, Q57, Q58

4. Examine the use of environmental and social performance measurement

Q37, Q38, Q39, Q40, Q41, Q59, Q60, Q61, Q62

5. Discuss the issues surrounding individual performance measurement

Q42, Q43, Q44, Q45, Q63, Q64

6. Assess the use of non-financial performance measures

Q46, Q47, Q48, Q49, Q50, Q65

Multiple-choice questions

1. What is the term used to describe a statement setting out an entity’s overall philosophy and objectives?

a. Financial statement

b. Mission statement

c. Statement of profit or loss

d. Integrated statement

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. Which of the following statements is true?

a. The balanced scorecard is designed to encourage the use of a wide range of measures to gauge performance.

b. The balanced scorecard uses only short-term performance measures.

c. The balanced scorecard uses only long-term performance measures.

d. The balanced scorecard is used because there is a causal relationship between all of the measures and their economic impact.

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. Which one of these perspectives is not used by the balanced scorecard?

a. Employee

b. Customer

c. Financial

d. Innovation and improvement activities

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. In using the balanced scorecard, which of the four perspectives would most likely apply to the measures of ‘customer response time’ and ‘quality training and documentation’?

a. Financial

b. Customer

c. Internal operations

d. Innovation and improvement activities

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. Which of the below options describes one of the main criticisms of the balanced scorecard?

a. Senior management are seldom committed to its success

b. The causal relationship between some measures and their economic impact have not been tested

c. It must be introduced without a trial

d. It only measures financial performance

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. Which of the following could undermine the value of the balanced scorecard to an entity?

a. Using the scorecard as an extra level of top-down management control.

b. Not making available appropriate resources such as training for implementation of the balanced scorecard.

c. Not ensuring that top management are committed to the success of the balanced scorecard.

d. All of the options could undermine the value of the balanced scorecard to an entity.

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. The balanced scorecard framework implies that:

a. traditional performance measures alone are inadequate to capture the entire performance of the entity.

b. only short-term measures need to be considered.

c. non-financial as well as financial measures need to be considered.

d. only long-term measures need to be considered.

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. In using the balanced scorecard, which of the perspectives would most likely apply to the goals of ‘survive’, ‘succeed’ and ‘prosper’?

a. Financial

b. Customer

c. Internal operations

d. Innovation and improvement activities

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. What is a key performance indicator (KPI)?

a. Measure of management performance

b. A performance measure of profitability

c. Performance measure used only by manufacturing entities

d. Performance measure that is critical for the success of an entity

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. A term for a division, segment or branch of an organisation is:

a. business unit.

b. entity.

c. corporation.

d. firm.

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. Appointing managers to be responsible for the performance of specific divisions of an entity assists in which of the following?

a. Freeing up central management time for strategic long-term planning.

b. Improving the commitment and motivation of managers.

c. Improving the timeliness of and access to information as a result of localised decision making.

d. All of the options are ways in which appointing division managers assists an entity.

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. When reporting on divisional performance, what format is generally used?

a. Contribution margin format

b. Statement of financial position format

c. Gross profit format

d. Net profit format

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. What should be identified when evaluating the performance of divisions?

a. Only uncontrollable revenues should be identified

b. Only controllable costs should be identified

c. Both controllable and non-controllable revenues and costs should be identified

d. None of the options are correct

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. A responsibility centre for costs, revenues and investment in assets is a(n):

a. cost centre.

b. revenue centre.

c. profit centre.

d. investment centre.

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. Which option below would be the best financial performance measure for a profit centre?

a. Budgeted costs less actual costs

b. Economic value added

c. Cash inflows less cash outflows

d. Budgeted income less actual income

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. A centre that is solely responsible for generating a target level of income is known as a(n):

a. cost centre.

b. profit centre.

c. revenue centre.

d. investment centre.

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. Why are reports prepared on the performance of divisions?

a. To consider investment levels

b. To evaluate the division’s performance

c. To help provide a pricing guide for products and services

d. All of the above

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. Division B has a contribution margin of $200 000 and traceable fixed costs of $50 000, and is therefore making a divisional margin of $150 000. However, after the allocation of $180 000 of common costs, which would not be saved if the division were to be closed, it is making a loss of $30 000. Assuming all other factors are equal, if the division were closed, the effect on the overall profit of the organisation would be:

a. a decrease of $180 000.

b. a decrease of $150 000.

c. an increase of $30 000.

d. an increase of $150 000.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. The profit margin is 15.5% and investment turnover is 1.3 times. Calculate return on investment.

a. 20.2%

b. 11.9%

c. 1.3%

d. 15.5%

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Identify a disadvantage of return on investment as a performance measure.

a. ROI is difficult to calculate.

b. ROI links profit with the investment base.

c. ROI does not take into consideration the different size and type of divisions.

d. All of the options are disadvantages of return on investment as a performance measure.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Profit after tax is $600 000, taxation is $280 000, the required rate of return is 15%, and the investment is $2 000 000. Calculate the residual income.

a. $580 000

b. $300 000

c. 15%

d. 44%

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. A disadvantage of using economic value added as a performance indicator is:

a. complex modifications to the formula.

b. modifications can be manipulated.

c. it is a short-term performance indicator.

d. all of the above.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. An investment is $400 000, credit sales are $350 000 and cash sales are $200 000. Calculate the investment turnover ratio.

a. 0.73 times

b. 1.38 times

c. 2 times

d. 0.88 times

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Which of these is an investment base that could be used in ROI and RI calculations?

a. Original cost

b. Net book value

c. Current cost

d. All of the options are possible investment bases for ROI and RI calculations

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Identify an issue with using the original cost of an investment for calculating ROI and RI.

a. The calculations will become more favourable over time

b. There may be a delay in the replacement of the asset

c. The asset may be replaced too early

d. The calculation is based on today’s costs

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. If the purpose of an entity is to maximise the wealth of its owners, then the performance measure that will ensure managers make decisions in the best interest of the owners is:

a. profit margin.

b. return on investment.

c. residual income.

d. economic value added.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Return on investment is 12.5% and investment turnover is 1.2 times. What is the profit margin?

a. 15%

b. 10.42%

c. 9.6%

d. 13.7%

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. If the investment turnover ratio changes from 3.3 times to 4.1 times then, no matter what other factors may change, this indicates that:

a. return on investment will be higher.

b. less sales are being generated relative to investment.

c. more sales are being generated relative to investment.

d. return on investment will be lower.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Profit before tax is $210 000, required rate of return is 12% and the investment is $1 400 000. Calculate residual income.

a. $42 000

b. $1 190 000

c. 15%

d. $168 000

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Which of the following is an advantage of the residual income performance measure?

a. It minimises the suboptimal decision making that can stem from the use of ROI.

b. The cost of capital is easy to determine.

c. The required rate of return is easy to determine.

d. It encourages short-term decision making.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Which of these is a disadvantage of the return on investment performance measure?

a. The relationship between assets and profit are not easily linked.

b. Divisional managers can manipulate ROI by decreasing the investment base.

c. It encourages over-investment.

d. It is difficult to understand.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Why is there a need to combine return on investment (ROI) with long-term performance measures?

a. Because managers may reject an investment because it could decrease the overall ROI

b. Because ROI is a short-term performance measure

c. Because managers can manipulate the ROI for their own benefit

d. All of the options are true

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. What is economic value added (EVA)^®?

a. A measure of the economic increase in an entity’s value after an appropriate charge for capital has been deducted

b. A long-term performance measure of economic value created over a long period of time

c. A calculation that does not take into account how the investment is financed

d. All of the options are true

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Which of the following statements about the economic value added (EVA)^® performance measure is not true?

a. The charge deducted for the cost of capital can vary depending on the various levels of risk.

b. The formula to calculate EVA uses profit before tax.

c. The adjustments could be manipulated by managers.

d. It is a short-term economic performance indicator.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. When calculating ROI and RI under the opportunity cost principle the:

a. original cost is used as the investment base.

b. written-down value is used as the investment base.

c. market value is used as the investment base.

d. none of the options would be used when calculating ROI and RI under the opportunity cost principle.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. An evaluation of the performance of an investment centre is based on:

a. the economic return relative to the resources invested.

b. the gross profit of an investment.

c. a medium-term performance indicator.

d. the manager’s manipulation of the financial performance of the investment.

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Which of the following categories is not used in the Environmental management — Environmental performance evaluation — Guidelines relied upon by the United Nations Division for Sustainable Development (UNDSD)?

a. Operational performance indicators

b. Management performance indicators

c. Social performance indicators

d. Environmental condition indicators

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. What is the basic formula for calculating eco-efficiency?

a. eco-efficiency = environmental impact added / value added

b. eco-efficiency = value added / environmental impact added

c. eco-efficiency = value added x environmental impact added

d. eco-efficiency = value added – environmental impact added

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. The OECD states that eco-efficiency:

a. ‘provides information about the management’s efforts to influence an organisation’s environmental performance’.

b. ‘provides information about the local, regional, national or global condition of the environment which could be impacted by the entity’.

c. ‘expresses the efficiency with which ecological resources are used to meet human needs’.

d. all of the options listed are correct.

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. In sustainability reporting, how can indicators be expressed?

a. As ratios

b. In absolute figures

c. In percentages

d. All of these options are correct

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. Which of the below is a typical concern monitored via environmental condition indicators?

a. The sustainability report card

b. Return on investment (ROI)

c. Water and air quality

d. Product quality

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. Which of the following statements is not true in relation to measuring individual performance?

a. The individual performance measures should highlight the most important aspect of an employee’s job.

b. An example of a short-term incentive for individual employees is the payment of a bonus for meeting targets.

c. Executives’ incentive packages should only include financial performance measures.

d. Share options schemes are designed to reward executives for long-term performance.

Learning objective 14.5 ~ Discuss the issues surrounding individual performance measurement

1. A team-based reward scheme can cause:

a. close attention to each person’s performance.

b. individuals to be recognised for outstanding performance.

c. teams to fail to work together.

d. a slack employee to receive a bonus payment.

Learning objective 14.5 ~ Discuss the issues surrounding individual performance measurement

1. How do executive remuneration packages reward long-term performance?

a. Incentives such as share option plans

b. A company car

c. An annual bonus based on achievement of profit targets

d. Fixed salary and superannuation

Learning objective 14.5 ~ Discuss the issues surrounding individual performance measurement

1. Which of the following could be included in a director’s salary package?

a. Travel

b. Additional superannuation contributions

c. Company car

d. All of these options could be included in a director’s salary package

Learning objective 14.5 ~ Discuss the issues surrounding individual performance measurement

1. Which of the following is a disadvantage of non-financial performance measures?

a. They are not likely to be linked to the goals of the organisation.

b. Various non-financial performance measures can give conflicting results.

c. They usually promote long-term thinking.

d. They can take longer to identify an entity’s problems.

Learning objective 14.6 ~ Assess the use of non-financial performance measures

1. Which of the following is an example of a financial performance measure?

a. Production and delivery lead times

b. Employee productivity

c. Process downtime

d. Return on investment

Learning objective 14.6 ~ Assess the use of non-financial performance measures

1. Which of the following is an example of a non-financial employee performance measure?

a. Staff educational qualifications

b. Workers’ compensation claims

c. Percentage of absenteeism

d. All of these items are examples of a non-financial employee performance measure

Learning objective 14.6 ~ Assess the use of non-financial performance measures

1. What kind of non-financial performance measure helps a business keep on track to achieve its goals?

a. Short term

b. Operational

c. Balanced

d. Misunderstood

Learning objective 14.6 ~ Assess the use of non-financial performance measures

1. Non-financial measures should be:

a. linked to the organisation’s goals.

b. limited in number.

c. well-defined.

d. all of the above.

Learning objective 14.6 ~ Assess the use of non-financial performance measures

Fill in the blanks

1. A(n) ______________ statement is a short statement that sets out the overall philosophy and objectives of an entity.

a. mission

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. A framework that provides a set of performance measures that reflect an entity’s goals and strategies is known as a balanced____________.

a. scorecard

Learning objective 14.1 ~ Explain the importance of measuring organisational performance and outline common frameworks and reports used to assess and report organisational performance

1. Responsibility centres include cost centres, revenue centres, profit centres and ____________ centres.

a. investment

Learning objective 14.2 ~ Outline common organisational structures, responsibility centres and reasons for divisional performance evaluation and generate divisional performance reports

1. The investment _______________ ratio measures the amount of sales generated relative to the level of investment.

a. turnover

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. The profit margin is sometimes referred to as the ___________ on ____________.

a. return, sales

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. If return on sales is 12% and investment turnover is 1.25 times, then the return on investment is ____________.

a. 15%

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Using residual income (RI) as a performance indicator can encourage ____________ (short-term/long-term) decision making.

a. short-term

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. The ___________ value added performance measure is based on the economic increase in an organisation's value after a suitable charge for capital is deducted.

a. economic

Learning objective 14.3 ~ Apply investment-centre performance evaluation measures such as return on investment (ROI), residual income (RI) and economic value added

1. Environmental ____________ indicators provide information about the local, regional, national or global condition of the environment which could be impacted by an entity.

a. condition

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. __________________ is the term used to describe the focus on the efficient use of resources to minimise their impact on the environment.

a. Eco-efficiency

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. Material, energy and water consumption are typical environmental indicators of an organisation’s _______________ (operational/management) performance.

a. operational

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. The Kyoto Protocol recommends a cap and trade scheme to help countries reduce their ___________ emissions.

a. carbon

Learning objective 14.4 ~ Examine the use of environmental and social performance measurement

1. _____________ performance measures are designed to capture performance on multiple tasks, individual and team-based rewards, and short- and long-term rewards.

a. Individual

Learning objective 14.5 ~ Discuss the issues surrounding individual performance measurement

1. Changes to company __________________ and accounting standards now require large companies to report on director and executive remunerations in their external reports.

a. regulations

Learning objective 14.5 ~ Discuss the issues surrounding individual performance measurement

1. Non-financial performance measures should include _________________ such as past performance, targets or industry averages.

a. benchmarks

Learning objective 14.6 ~ Assess the use of non-financial performance measures