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Chapter 1Accounting Information and Managerial Decisions

MULTIPLE CHOICE 1. The main focus of managerial accounting is: A. decision making. B. the preparation of financial statements. C. the determination of net income. D. documenting cash flows. ANS: A PTS: 1 DIF: Easy

OBJ: 1

2. Which of the following statements is not true regarding the types of organizations that need accounting information? A. Both large and small organizations need accounting information. B. Manufacturing and merchandising organizations need accounting information. C. Only organizations that are for profit need accounting information. D. Service organizations need accounting information. ANS: C PTS: 1 DIF: Easy OBJ: 1 3. Which of the following is not true about knowledge in the business environment? A. It is the same as data and information. B. It is the value added from shared information. C. It includes both quantitative and qualitative information. D. It must be managed in order for a company to remain competitive. ANS: A PTS: 1 DIF: Easy OBJ: 1 4. ERP is an abbreviation for: A. Environmental Resource Planning B. Economic Resource Planning C. Enterprise Research Planning D. Enterprise Resource Planning ANS: D PTS: 1

DIF: Easy

OBJ: 1

5. Which of the following statements is not true regarding ERP? A. It integrates traditional accounting information systems with other information systems. B. It can be customized to provide specific and relevant information to different types of users. C. It has evolved in the past few years to address the shortcomings of traditional accounting information systems. D. It captures quantitative but not qualitative information. ANS: D PTS: 1 DIF: Easy OBJ: 1 6. A. B. C. D. ERP systems capture: only qualitative data. only quantitative data. both qualitative and quantitative data. the same information as a traditional accounting information systems. PTS: 1 DIF: Easy OBJ: 1

ANS: C

7. A. B. C. D.

An example of qualitative data is: product cost. customer satisfaction. net income. operating costs. PTS: 1 DIF: Easy OBJ: 1

ANS: B 8. A. B. C. D.

An example of quantitative data is: company reputation. number of customer complaints. customer satisfaction. product quality. PTS: 1 DIF: Easy OBJ: 1

ANS: B 9. A. B. C. D.

Which of the following statements is not true regarding knowledge management tools? ERP systems are usually not effective as a knowledge management tool. Data warehouses are an example of a knowledge management tool. Knowledge warehouses are an example of a knowledge management tool. Data mining software can be used as a knowledge management tool. PTS: 1 DIF: Easy OBJ: 2

ANS: A 10. A. B. C. D.

Which of the following serves as a central depository for electronic data? Knowledge warehouse ERP system Data warehouse Balance sheet PTS: 1 DIF: Easy OBJ: 2

ANS: C

11. ____ is a term used to describe the process of searching for and extracting information from a computer system. A. Managerial accounting B. Data mining C. Sensitivity analysis D. Electronic data interchange ANS: B PTS: 1 DIF: Medium OBJ: 2

12. Which of the following is organized in such a way as to provide access to a wide variety of qualitative data? A. Data warehouse B. Traditional accounting information system C. Knowledge warehouse D. Financial statements ANS: C PTS: 1 DIF: Medium OBJ: 2

13.

Which of the following is not true regarding an ERP system? A. It may be used by both manufacturing and service organizations. B. It will indicate where inefficiencies exist within an organization. C. It is usually implemented for a relatively low cost. D. It is focused on providing real-time information. ANS: C 14. A. B. C. D. PTS: 1 DIF: Easy OBJ: 2

Which of the following statements is false regarding an ERP system? It digitally records every business transaction a company makes. Increased profits are not guaranteed with its use. Only large-sized companies can afford to implement it. It transforms data into usable knowledge. PTS: 1 DIF: Medium OBJ: 2

ANS: C 15. A. B. C. D.

Which of the following is not a benefit of electronic data interchange? Increased lead times Increased speed of information exchange Reduced processing costs Increased integration between customer orders and the production process PTS: 1 DIF: Easy OBJ: 2

ANS: A

16. Which of the following statements is true? A. External and internal users of accounting information have exactly the same information needs. B. Financial accounting is less flexible than managerial accounting. C. Managerial accounting provides the best information to external users. D. Managerial emphasizes the organization as a whole more than financial accounting. ANS: B 17. A. B. C. D. PTS: 1 DIF: Easy OBJ: 3

Which of the following is not an example of an external user of accounting information? Potential and existing stockholders Government taxing agencies Potential and existing creditors Management PTS: 1 DIF: Easy OBJ: 3

ANS: D 18. A. B. C. D.

Which of the following is an example of an internal user of accounting information? Supplier Stockholder Manager Federal tax agency PTS: 1 DIF: Easy OBJ: 3

ANS: C

19.

Which of the following is not one of the three primary activities of managers? A. Tax preparing activities B. Planning activities C. Operating activities D. Controlling activities ANS: A PTS: 1 DIF: Easy OBJ: 4 20. ____ involve(s) the development of short-terms objectives and goals. A. Controlling activities B. Strategic planning C. Operational planning D. Financial activities ANS: C PTS: 1 DIF: Easy OBJ: 4 21. Looking at how a company will distinguish itself from its competitors involves: A. Operational planning B. Strategic planning C. Internal planning D. Financial planning ANS: B PTS: 1 DIF: Easy OBJ: 4 22. A companys decision on where to locate a new factory is most likely a result of: A. Operating activities B. Operational planning C. Strategic planning D. Controlling activities ANS: C PTS: 1 DIF: Easy OBJ: 4 23. Which manager activity would address the decision on whether or not to accept a special order within the next few days? A. Sales activity B. Strategic planning activity C. Operating activity D. Controlling activity ANS: C PTS: 1 DIF: Easy OBJ: 4 24. All of the following are examples of operating activities except: A. Decisions on whether or not to schedule overtime for employees. B. Decisions on what price to charge for a product. C. Decisions on whether or not to accept a special order. D. Decisions on whether actual outcomes were similar to desired outcomes. ANS: D PTS: 1 DIF: Medium OBJ: 4 25. Which type of business manager decides how much inventory should be kept on hand? A. Finance manager B. Operations/production manager C. Marketing manager D. Human resource manager ANS: B PTS: 1 DIF: Easy OBJ: 5

26. Which type of business manager decides whether a company should borrow money or issue stock as a way to raise money? A. Human resource manager B. Operations/production manager C. Finance manager D. Marketing manager ANS: C PTS: 1 DIF: Easy OBJ: 5

27. Which type of business manager would be the most likely to decide whether or not a company should lease or buy expensive manufacturing equipment? A. Operations/production manager B. Human resource manager C. Finance manager D. Marketing manager ANS: C PTS: 1 DIF: Easy OBJ: 5

28. Which type of business manager would be the most likely to decide whether or not employees need to work overtime in order to fill a special order? A. Human resource manager B. Operations/production manager C. Finance manager D. Marketing manager ANS: B PTS: 1 DIF: Easy OBJ: 5

29. Which type of business manager would most likely be involved in product packaging decisions? A. Marketing manager B. Operations/production manager C. Finance manager D. Human resource manager ANS: A PTS: 1 DIF: Easy OBJ: 5

30. Which type of business manager would most likely be in charge of deciding on the type of benefit package an employee receives? A. Finance manager B. Operations/production manager C. Human resource manager D. Marketing manager ANS: C 31. A. B. C. D. PTS: 1 DIF: Easy OBJ: 5

The primary role of the managerial accountant is to: enter data into the accounting system. collect data. analyze information and create knowledge. prepare tax returns. PTS: 1 DIF: Easy OBJ: 6

ANS: C

32. In the past 5-10 years, the role of the managerial accountant: A. has been replaced by the financial accountant. B. has not changed much. C. has adapted to changes in the environment of business. D. has become more clerical in nature. ANS: C PTS: 1 DIF: Easy OBJ: 6 33. Managerial accountants primarily see themselves as: A. bookkeepers. B. human resource managers. C. facilitators of management decision-making processes. D. tax preparers. ANS: C PTS: 1 DIF: Easy

OBJ: 6

34. Which of the following is a characteristic of managerial accounting? A. It is used primarily by external users. B. It often lacks flexibility. C. It is often future-oriented. D. The information it provides is extremely precise. ANS: C PTS: 1 DIF: Easy OBJ: 6 35. Which of the following is true regarding managerial accounting? A. It often emphasizes segments rather than the organization as a whole. B. It often must follow established rules called generally accepted accounting principles. C. Its primary focus is on providing information to external users. D. It is less flexible than financial accounting. ANS: A PTS: 1 DIF: Easy OBJ: 6 36. One of the advantages of managerial accounting is its: A. timeliness. B. extreme accuracy. C. focus on the past. D. strict adherence to generally accepted accounting principles. ANS: A PTS: 1 DIF: Easy OBJ: 6 37. Which of the following statements about accounting information users is correct? A. External users rely most heavily on managerial accounting. B. Internal users prefer to have only quantitative information. C. Internal users prefer to use financial statements prepared using generally accepted accounting principles for most of their decision-making needs. D. Internal users are often willing to forego accuracy in order to have timely information. ANS: D PTS: 1 DIF: Easy OBJ: 6 38. Which of the following is not acceptable with regards to managerial accounting information? A. Use of estimates B. Lack of timeliness C. Flexibility D. Detailed reporting

ANS: B 39. A. B. C. D.

PTS: 1

DIF: Easy

OBJ: 6

What is the source of most of the information that a shareholder has available to them? Tax returns Cost reports Budgets Financial statements PTS: 1 DIF: Easy OBJ: 6

ANS: D

40. The production manager needs to decide on whether or not to accept a special order from a specific customer. Which of the following reports would be the best source of information available to make this decision? A. Last years financial statements B. Tax returns C. Cost reports D. Stock market reports ANS: C PTS: 1 DIF: Easy OBJ: 6 41. Which of the following is not an example of an external accounting information user? A. Finance manager B. Securities and Exchange Commission (SEC) C. Creditor D. Shareholder ANS: A PTS: 1 DIF: Easy OBJ: 6 42. I. II. III. IV. Use the following key to indicate the correct order in the decision-making process: identify objectives select the best option define the problem identify and analyze available options

A. I, III, IV, II B. III, I, IV, II C. IV, I, III, II D. II, I, III, IV ANS: B

PTS: 1

DIF: Easy

OBJ: 7

43. Which of the following statements about decision-making is true? A. Risk should not be taken into account. B. Objectives should be quantitative and not qualitative. C. Managers often do not have a clear understanding of the real source of the problem. D. Sunk costs should usually be taken into account. ANS: C PTS: 1 DIF: Easy OBJ: 7 44. A. B. C. D. In the decision-making process, an example of a quantitative measure would include: employee morale. product satisfaction. customer service. number of pounds needed.

ANS: D 45. A. B. C. D.

PTS: 1

DIF: Easy

OBJ: 7

Decision-makers should consider: only qualitative factors. only quantitative factors. both quantitative and qualitative factors. sunk costs as well as quantitative and qualitative factors. PTS: 1 DIF: Easy OBJ: 8

ANS: C

46. Relevant costs are costs that: A. do not differ between alternatives. B. differ between alternatives. C. have already been incurred. D. may not be eliminated by choosing one alternative over another. ANS: B PTS: 1 DIF: Easy OBJ: 8 47. Costs that differ between alternatives are called: A. sunk costs. B. irrelevant costs. C. relevant costs. D. unavoidable costs. ANS: C PTS: 1 DIF: Easy

OBJ: 8

48. MaryAnn is trying to decide whether to fly to Florida or New York. The cost of her ticket will be the same either way. The cost of the ticket is an example of a(n): A. sunk cost. B. opportunity cost. C. relevant cost. D. irrelevant cost. ANS: D PTS: 1 DIF: Easy OBJ: 8 49. Sunk costs are: A. usually relevant. B. costs that will occur in the future. C. not relevant. D. costs that can be avoided. ANS: C PTS: 1

DIF: Easy

OBJ: 8

50. Relevant costs: A. are sunk costs. B. are costs that differ among alternatives. C. are unavoidable. D. can not be opportunity costs. ANS: B PTS: 1 DIF: Easy 51. A. B. C. D.

OBJ: 8

When making a decision, which of the following should not be considered? Relevant costs Opportunity costs Sunk costs Risk

ANS: C 52. A. B. C. D.

PTS: 1

DIF: Easy

OBJ: 8

Which of the following is not true with regard to opportunity costs? They are the benefits forgone by selecting one alternative over another. They are relevant. They are sometimes difficult to quantify. They have already occurred in the past. PTS: 1 DIF: Easy OBJ: 8

ANS: D

53. You are now considering your housing options for next semester. If the cost of a dorm room and the cost of an apartment are exactly the same, housing costs are: A. sunk costs. B. an opportunity cost. C. not relevant. D. relevant. ANS: C PTS: 1 DIF: Easy OBJ: 8

54. You are now considering your housing options for next semester. If the cost of a dorm room and the cost of an apartment are the same, but the apartment is larger, then: A. both cost and size are relevant. B. neither cost nor size are relevant. C. cost is relevant but size is not. D. size is relevant but cost is not. ANS: D PTS: 1 DIF: Easy OBJ: 8

55. You are considering your housing options for next semester. The cost of a dorm room and the cost of an apartment are the same. You paid a $50 non-refundable deposit to live in the dorm last year. This deposit is an example of a(n): A. opportunity cost. B. relevant cost. C. sunk cost. D. avoidable cost. ANS: C 56. A. B. C. D. PTS: 1 DIF: Easy OBJ: 8

Which of the following would be an irrelevant cost? Future costs that differ among alternatives. Benefits foregone be choosing one alternative over another. Costs that have already been incurred. Costs that are avoidable. PTS: 1 DIF: Easy OBJ: 8

ANS: C

57. Which of the following statements about risk in decision-making is not true? A. It may be taken into account by adjusting the discount rate used in time value of money calculations. B. It may be taken into account with the use of sensitivity analysis. C. Decision-makers will factor in risk equally in their decisions. D. Most decisions involve risk in some capacity.

ANS: C 58. A. B. C. D.

PTS: 1

DIF: Easy

OBJ: 9

Which of the following statements about risk is correct? Risk is usually not relevant to most business decisions. Risk may be adjusted for by using sensitivity analysis. Risk is easy to measure and quantify. Most decision-makers will measure risk in exactly the same way. PTS: 1 DIF: Easy OBJ: 9

ANS: B 59. A. B. C. D.

Risk: never affects decision-making. is not a consideration in the decision-making model. can be eliminated by adjusting the discount rate used in the decision-making model. can be adjusted for by considering the probability that certain events will occur. PTS: 1 DIF: Medium OBJ: 9

ANS: D

60. Sensitivity analysis: A. is a quantitative method of evaluating a decision-makers sensitivity to ethical situations. B. is the process of changing the values of key variables in decision-making to determine how sensitive decisions are to those changes. C. is the decision-making process of adjusting the discount rate used in time value of money calculations. D. does not take risk into account. ANS: B PTS: 1 DIF: Medium OBJ: 9

61. All of the following statements about enterprise risk management (ERM) are true except? A. ERM helps ensure that companies comply with laws and regulations. B. ERM helps companies meet their tax and financial reporting requirements. C. ERM helps companies address one type of risk at a time so that managers do not become overwhelmed. D. ERM is a systematic approach to identifying and managing risks faced by companies. ANS: C PTS: 1 DIF: Easy OBJ: 10

62. Which of the following must explicitly be considered in order to implement ERM effectively? A. the companys risk appetite B. how well the company manages risk in a non-ERM environment C. the companys reputation D. all of the above must be considered ANS: A PTS: 1 DIF: Easy OBJ: 10

63. Which of the following statements is true regarding ethics in decision-making? A. Since most business decisions are simply a matter of economics, ethical considerations should be ignored. B. Decision-making can have an ethical as well as an economic impact. C. Managerial accountants do not face ethical issues. D. Business managers will always agree on ethical choices.

ANS: B 64. A. B. C. D.

PTS: 1

DIF: Easy

OBJ: 11

Which of the following should not be taken into account in decision-making? Risk Ethical considerations Irrelevant costs Opportunity costs PTS: 1 DIF: Easy OBJ: 11

ANS: C SHORT ANSWER

1. Accounting information systems generate both monetary and non-monetary accounting information. List two examples of each type of accounting information. ANS: Monetary accounting information generated by an accounting information system includes sales, net income, total costs, and costs of product or services. Non-monetary accounting information generated by an accounting information system includes: number of budgeted labor hours, the number of units necessary to break even, units shipped, and the time it takes to manufacture a product. PTS: 1 DIF: Medium OBJ: 1

2. Identify one internal user of accounting information and one external user of accounting information. Provide a specific example of how accounting information might be used by each. ANS: Examples of internal users and the manner in which they use accounting information could include: Production manager: assess the efficiency of the production process Marketing manager: help set a proper sales price for an item Regional manager: decide whether to maintain or close individual divisions Finance personnel: plan capital expenditures

Examples of external users and the manner in which they use accounting information could include: Stockholders or potential investors: help analyze the profitability of an organization Donors of non-profit organizations: help determine the future donations, identify use of prior donations Bank officials or creditors: decide whether to lend money to an organization Government agencies: assess compliance with laws and regulations (e.g. taxes) DIF: Medium OBJ: 3

PTS: 1

3.

Discuss how a managerial accounting report prepared for an internal user might differ from a financial accounting report prepared for an external user. ANS: Managerial accounting reports prepared for internal users are generally characterized by the following: They do not have to follow standardized rules set by an authoritative body. They are typically more detailed than financial reports. They are more future-oriented. They are focused on the needs of the user. They are timelier and more relevant. (This is not an exhaustive list.) In contrast, financial accounting reports are generally characterized by the following: A lack of flexibility. The reporting of past events using historical costs. The focus of reporting on the business on a whole rather than individual products. The reports are prepared in accordance with GAAP. (This is not an exhaustive list.) PTS: 1 DIF: Medium OBJ: 3

4. Managers are responsible for numerous activities including planning, operating, and controlling. Define these three types of activities and provide at least one example of each. ANS: Planning activities involve the development of both short-term (operational) and long-term (strategic) objectives and goals of an organization and an identification of the resources needed to achieve them. Examples include budget preparation, capital expenditure decisions, plant expansion decisions, production plans, etc. Operating activities involve the day-to-day operations of a business. Examples include special order decisions, pricing decisions, employee policy decisions, etc. Controlling activities involve the motivation and monitoring of employees and the evaluation of people and other resources used in the operations of the organization. Examples include employee evaluations, bonus calculations, employee rewards, etc. PTS: 1 DIF: Medium OBJ: 4

5.

Select one of the following functional managers and provide an example of the type of accounting information that they might request from the managerial accountant: marketing manager, operations/production manager, human resource manager, or finance manager. ANS: Marketing manager - product costs, advertising costs, costs of product enhancements, sales commissions, shipping costs Operations/Production manager - product costs, labor costs, overhead costs Human resource manager - production projections, labor needs Finance manager - cash needs, capital needs PTS: 1 DIF: Medium OBJ: 5

6. Select one of the following functional managers and discuss how they might use accounting information in their managerial role: marketing manager, operations/production manager, human resource manager, or finance manager. ANS: Marketing manager - help set a proper sales price for an item, make product enhancement decisions, make advertising decisions, make distribution decisions Operations/Production manager - make production planning decisions, assess the efficiency of the production process Human resource manager - determine how many people to hire, decide whether to maintain or close individual divisions, motivate employees to perform optimally Finance manager - plan capital expenditures, arrange financing PTS: 1 7. DIF: Medium OBJ: 5

Describe the role of the management accountant within an organization.

ANS: Managerial accountants present financial information in a manner that is useful to managers within an organization. They also help managers within various functional areas to understand financial information and make better decisions. They are often involved with financial planning and financial modeling. PTS: 1 DIF: Medium OBJ: 6

8. How has the automation of accounting information altered the role of the managerial accountant? ANS: Automation in present-day organizations allows clerical staff to gather and input accounting information. Most computer systems have the ability to generate data reports. Therefore, the managerial accountant is able to spend time monitoring and interpreting the reports generated by the automated system. They also aid managers in the decision-making process and perform more financial planning and modeling. PTS: 1 DIF: Medium OBJ: 6

9. Grant Enterprises is considering the introduction of a new product. The marketing and production departments have begun informal discussions about its design, production, and sales. List three examples of accounting information that the marketing and production managers would find useful in their meeting. ANS: Examples might include: projected product costs, breakeven figures, the effects of the new product on corporate net income, storage costs, advertising budgets, effects of outsourcing, labor costs, production capacity, and capital expenditure analysis. PTS: 1 10. DIF: Medium OBJ: 6

List the four steps in the decision-making process in the proper order.

ANS: Define the problem Identify the objectives Identify and analyze available options Select the best option PTS: 1 DIF: Easy

OBJ: 7

11. Distinguish between quantitative objectives and qualitative objectives. Provide an example of each. Which would be used by managers in their decision making? ANS: Quantitative objectives can be expressed in terms of dollars or other quantities, such as units or pounds. Qualitative objectives deal with non-numerical attributes or characteristics. Quantitative - assets expressed in thousands of dollars, number of feet of material used to make a jacket, number of allowable defects Qualitative - customer satisfaction, employee contentment with job responsibilities, quality control Both quantitative and qualitative objectives should be considered by managers when making decisions. PTS: 1 DIF: Medium OBJ: 8

12.

You are trying to decide what to do during your next school break. One campus group is planning a trip to Jacksonville Beach. Another is planning a ski trip to Snowmass. Many students will be going home to see family, and others will remain on campus. List three factors that you might consider in making your decision. ANS: Answers will vary, but may include: the student's financial situation whether or not the student likes the students within each campus group does the student prefer the beach or skiing does the student have to study or work during the break the cost of each alternative PTS: 1 DIF: Medium OBJ: 8

13. What is risk? Describe one of the three methods for integrating risk into the decisionmaking process? ANS: Risk is the likelihood that an alternative chosen in a decision situation will yield unsatisfactory results. Risk can be considered in the decision-making model by: 1) adjusting the discount rate used in the time value of money calculations, 2) determining the probability that certain events will occur, and 3) the use of sensitivity analysis. PTS: 1 PROBLEM 1. You and your roommate would like to purchase a projection TV for your apartment. You have gathered the following information about the two leading models: Factors Screen size Picture Quality Cost Delivery Charge Xenabox 1000 50 inch great $1300 $50 BigScreen 1050 50 inch good $1200 $50 DIF: Medium OBJ: 9

You paid $750 for your current TV two years ago. Required:

a. b. c.

Which of the four factors listed above are relevant to your decision? Is the cost of your old TV relevant to your decision? Why or why not? Which of the factors are quantitative and which are qualitative?

ANS: a. The picture quality and cost are relevant since they differ among the two alternatives. b. c. The cost of the old TV is a sunk cost and therefore is not relevant to the current decision. Only the picture quality variable is qualitative, the rest are quantitative. DIF: Medium OBJ: 8

PTS: 1

2. A friend has informed you of a part-time job for which you are well-qualified. It would begin next semester and require working 20 hours a week at a rate of $35 per hour. You would have to commute 2 hours round trip four days a week to work. You have already registered for 18 credit hours (6 classes) next semester, and you have been told that each of the classes is very demanding, requiring projects and extensive study time. If you complete these 18 hours, you will graduate. You are only taking 12 credit hours this semester. You have enough money for tuition ($100 per credit hour) and room and board but would love some extra spending money. Required: a. b. c. d. e. f. Define your problem related to the information above. What information above would you consider relevant to the decision? Why? What information above would you consider not relevant to the decision? Why? What other factors not provided above might be relevant to the decision? What are some possible alternatives? Which alternative would you choose? Why?

ANS:

a. b.

A well-paying part-time job is available; however, the job will most likely affect your studies. Should you accept the part-time job? Relevant - work hours, commuting hours, hourly wages, demands for next semester, need for spending money Answers may vary.

c.

Not relevant - number of hours this semester, tuition cost Answers may vary.

d.

Answers might include: Would the work hours conflict with your class schedule? Is the job related to your major or future career plans? Do you have a reliable car to make the commute in? Can you drop any classes? Do not accept the job; accept the job and drop some classes; accept the job and do not drop any classes Answers will vary depending upon the "why." DIF: Medium OBJ: 8

e. f.

PTS: 1