Segment Reporting and Performance Evaluation
Self Test
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
Responsibility Accounting – Segment Reporting:
1. Of the following, which is not a responsibility center?
a. profit center
b. investment center
c. cost center
d. revenue center
Answer
D. A revenue center is not a responsibility center. The other three are types of responsibility centers.
2. Responsibility accounting means
a. a company reports all socially responsible activities
b. a firm consistently applies accounting principles
c. a firm holds top management responsible for performance
d. activity is controlled by a manager responsible for profits or cost control
Answer
D. A manager is held responsible for the activity that is in the area they are accountable for. Accountability may cover costs, profits, and investments in assets depending on the type of center.
3. The manufacturing plant in a company with a separate sales division is considered to be a
a. profit center
b. investment center
c. cost center
d. revenue center
Answer
C. The manufacturing plant manager is responsible for costs only. The sales manager is responsible for revenues from the products manufactured. A department or division that only incurs costs is a cost center.
4. In a decentralized organization, lower level managers
a. make key decisions
b. implement only decisions made by upper management
c. evaluate the outcome of key decisions only
d. supervise employees only
Answer
A. Decentralization means that lower level managers are responsible for making decisions regarding things they are responsible for. Lower level managers get to make and also implement decisions. Evaluating the outcome of key decisions is normally done by upper management using performance reports.
5. Segment margin is determined as
a. sales less all costs
b. sales less variable costs less direct costs
c. sales less variable costs less all fixed costs
d. sales less direct costs less allocated costs
Answer
B. Segment margin is calculated as sales less variable costs (which are always direct) and all direct fixed costs.
6. Which type of cost will not be incurred when a segment is discontinued?
a. allocated costs
b. nontraceable costs
c. direct cost
d. period costs
Answer
C. Direct costs will not be incurred by the company when a segment is discontinued. Allocated and nontraceable costs will continue to be incurred and will be allocated to other segments. Period costs can be either direct or allocated. Direct and traceable costs will not be incurred when the segment is discontinued.
7. A department that has responsibility for revenues and costs is
a. an administrative center
b. a sales center
c. a profit center
d. an investment center
Answer
C. A profit center has responsibility for revenues and costs. The profit center does not make decisions on investing in assets.
8. Which type of cost will be incurred when a segment is discontinued?
a. allocated costs
b. traceable costs
c. all direct costs
d. direct product costs
Answer
A. Allocated costs will be incurred by the company when a segment is discontinued. Allocated costs will be allocated to other segments. Direct and traceable costs will not be incurred when the segment is discontinued.
9. Total company profitability is determined by
a. adding all the segment profits together
b. adding all the segment profits together and subtracting all allocated and nontraceable costs
c. adding all the segment profits together and adding all allocated and nontraceable costs
d. adding all segment profits together and subtracting direct costs
Answer
B. Total company profitability includes all revenues, all direct costs, and all allocated and nontraceable costs. Revenue less direct cost is segment margin less all allocated and nontraceable costs gives total company profits.
10. A segment is defined as
a. a part of the business where revenue and cost data is required for decision making
b. a part of the business that produces revenues only
c. all of the company’s departments combined
d. a significant part of the business that management does not monitor
Answer
A. The definition of a segment is a part of the business that makes decisions and is evaluated based on revenue and cost data.
Performance Evaluation:
1. Return on investment uses all of the following except
a. operating income
b. long term debt
c. average operating assets
d. sales
Answer
B. Return on investment uses operating income, sales, and average operating assets. Liabilities are not a factor in the calculation.
2. Income earned over and above a minimum required return is called
a. contribution margin
b. gross profit
c. residual income
d. required income
Answer
C. Residual income is the amount that is earned over and above the income required to be earned, which is the minimum return. Contribution margin and gross profit do not consider all costs. Required income is the same term as minimum return.
3. Asset turnover is calculated
a. total average assets divided by sales
b. sales divided by total average assets
c. income divided by total average assets
d. total average assets divided by sales
Answer
B. Asset turnover is calculated by sales divided by total average assets. This ratio gives the amount of sales generated for each dollar invested in assets.
4. Profit margin is calculated
a. operating income divided by sales
b. operating income divided by assets
c. sales divided by operating income
d. asset turnover divided by sales
Answer
A. Profit margin is calculated by operating income over sales. This ratio gives the amount of profit generated from each dollar of sales.
5. Return on investment is equal to
a. asset turnover divided by profit margin
b. profit margin divided by asset turnover
c. profit margin times asset turnover
d. operating assets divided by profit margin
Answer
C. Return on investment considers profit margin and asset turnover. You multiply the two to get return on investment.
6. Residual income is
a. net income divided by profit margin
b. average total assets times profit margin
c. operating income greater than the required return
d. a required return determined by profit margin
Answer
C. Residual income is calculated as actual operating income less the required return. Required return is equal to operating assets times a minimum required return percentage.
7. Operating income is
a. income before other revenues and expenses
b. income before tax expense
c. income before tax and interest expense
d. income after tax and interest expense
Answer
C. Operating income is income before interest and tax expense. It includes all revenues and expenses except interest and taxes.
8. Average operating assets are calculated as
a. operating assets at the end of the period
b. beginning plus ending times 2
c. beginning plus ending divided by 2
d. all assets on the balance sheet
Answer
C. Beginning plus ending divided by two is the way to calculate average. Only assets used to produce revenues are considered operating assets.
9. When sales decrease and income and operating assets do not change
a. asset turnover increases
b. profit margin increases
c. return on investment won’t change
d. residual income decreases
Answer
B. Sales is used in both profit margin and asset turnover. A decrease in sales will give a higher profit margin and a lower asset turnover. When both components change, total return on investment will change. If income and operating assets do not change, residual income will not change either.
10. Which of the following is a part of operating assets
a. land held for speculative investment
b. stock in your own company
c. accounts receivable
d. accounts payable
Answer
C. Operating assets are all assets used to general revenues for the business. Accounts receivable is an asset generated from the day to day business. Cash is tied up in accounts receivable until collected. Accounts payable is a liability. Land held for speculation is not being used to generate revenues. Stock in your own company is treasury stock which is not an asset.