Financial Decision Making Test
Preparation
Course Introduction
Financial Decision Making explores the principles and analytical tools necessary for effective financial management within organizations and for individuals. The course covers topics such as time value of money, risk and return analysis, budgeting, capital structure, investment appraisal, working capital management, and financial statement analysis. Emphasis is placed on using quantitative and qualitative information to make informed financial decisions, addressing real-world challenges in areas like resource allocation, short- and long-term financing, and strategic planning. By integrating theory with practical applications, the course prepares students to evaluate financial alternatives and understand the broader impact of their financial decisions within a dynamic business environment.
Recommended Textbook
Management Accounting for Business 6th Edition by Colin Drury
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Page 2
Chapter 1: Introduction to Management Accounting
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Sample Questions
Q1) Describe the connection between planning, controlling, and feedback.
Answer: Planning establishes performance standards, feedback compares actual performance with planned performance, and control uses feedback to evaluate deviations from plans.
Q2) Financial accounting is primarily concerned with providing financial reports to all of the following EXCEPT
A) creditors such as banks and other financial institutions.
B) creditors such as suppliers.
C) shareholders of the company.
D) management of the firm.
Answer: D
Q3) Improvement in time performance is most likely NOT enhanced by A) redesign of products.
B) adding processes in production.
C) eliminating waste.
D) eliminating nonvalue-added activities.
Answer: B
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Chapter 2: An Introduction to Cost Terms and Concepts
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Sample Questions
Q1) Cost behaviour analysis focuses on
A) how costs react to changes in profit.
B) how costs change over time.
C) how costs react to changes in activity level.
D) both a and c
Answer: C
Q2) _____ are costs incurred that provide long-term activity capacity, usually as the result of strategic planning.
A) Discretionary fixed expenses
B) Committed fixed expenses
C) Mixed costs
D) Step-variable costs
Answer: B
Q3) Unit costs are critical for A) valuing inventory.
B) determining net income.
C) decisions to enter a new product line.
D) all of the above.
Answer: D
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Page 4
Chapter 3: Cost-Volume-Profit Analysis
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Sample Questions
Q1) Which of the following assumptions does NOT pertain to cost-profit-volume analysis?
A) Sales price per unit remains constant.
B) The sales mix is constant.
C) Inventories in a manufacturing entity may go up or down.
D) Fixed expenses are constant at all volumes of activities within the relevant range.
Answer: C
Q2) The relevant range is
A) a relatively wide range of sales where total variable costs remain the same.
B) a relatively wide range of sales where all costs remain the same.
C) a relatively narrow range of production where total variable costs remain the same.
D) a relatively wide span of production where total fixed costs are expected to remain the same.
Answer: D
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Chapter 4: Measuring Relevant Costs and Revenues for Decision-Making
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Sample Questions
Q1) For a cost or revenue to be relevant to a particular decision, the cost or revenue must
A) differ between the alternatives being considered
B) be a past cost
C) be a future cost
D) Both a and c above are correct.
Q2) Which item is not an example of a sunk cost?
A) materials needed for production
B) purchase cost of machinery
C) depreciation
D) All are sunk costs.
Q3) If there is excess capacity, the minimum acceptable price for a special order must cover
A) variable costs associated with the special order.
B) variable and fixed manufacturing costs associated with the special order.
C) variable and incremental fixed costs associated with the special order.
D) variable costs and incremental fixed costs associated with the special order plus the contribution margin usually earned on regular units.
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Page 6
Chapter 5: Pricing Decisions and Profitability Analysis
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Sample Questions
Q1) Refer to Figure 1 above, what amount of sales-force costs would be allocated to the five smaller customers if these costs are allocated based on sales volume?
A) £144,000
B) £216,000
C) £150,000
D) £225,000
Q2) Discuss the limitation of profit measurement.
Q3) Cost-based pricing has traditionally been important because:
A) cost data are available.
B) cost-based prices are defensible.
C) revenues must exceed costs if the firm is to remain in business.
D) of all of the above.
Q4) A target cost is computed as
A) the cost to manufacture plus a desired markup
B) the cost to manufacture plus the designated selling expenses
C) the market willingness to pay less the cost to manufacture
D) the market willingness to pay less the desired profit
Q5) Provide a short critique of cost-based pricing. What are the four major drawbacks to this pricing approach?
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Chapter 6: Capital Investment Decisions
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Sample Questions
Q1) Why would a company use the accounting rate of return?
A) to ensure that a new investment will not adversely affect accounting income
B) because it does not consider the time value of money
C) because it is a measure of liquidity
D) all of the above
Q2) The internal rate of return is the
A) rate of return that sets the project's net present value equal to zero
B) hurdle rate
C) cost of capital
D) required rate of return
Q3) A _____ is a capital budgeting model that considers the time value of money when evaluating proposed projects.
A) cash flow model
B) nondiscounting model
C) discounting model
D) rate of return model
Q4) Compare the various quantitative models used to evaluate capital budgeting proposals. Which models are preferred if used as the only criterion?
Q5) Describe capital investment in the advanced manufacturing environment.
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Chapter 7: Cost Assignment
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Sample Questions
Q1) The predetermined overhead rate is usually calculated
A) at the end of each month.
B) at the beginning of each month.
C) at the beginning of the year.
D) at the end of the year.
Q2) Why is it important to have an accurate and reliable product costing system?
Q3) Refer to Figure 1 above. What was Harrison Company's total cost to produce product XY?
A) £650,000
B) £910,000
C) £900,000
D) £890,000
Q4) Support department costs are accounted for in which one of the following ways?
A) They are allocated directly to units of product.
B) They are allocated to producing departments and then allocated to units of product.
C) They are allocated to units of product and then allocated to the producing departments.
D) They are expensed as incurred.
Q5) Define the terms cost objectives, cost pools, and allocation bases.
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Chapter 8: Activity-Based Costing
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Sample Questions
Q1) Batch-related costs are added to which of the following costs in break-even analysis?
A) variable
B) fixed
C) mixed
D) none of the above
Q2) An activity cost driver is
A) a factor that causes variations in a cost
B) another term for input measure
C) the largest single category of cost in a company
D) a variable cost
Q3) Refer to Figure 2. What will Chott's overhead application rate be if Chott uses theoretical capacity?
A) £10.00
B) £7.20
C) £7.83
D) £9.00
Q4) Describe several of the major differences between a traditional functional-based cost management system and an activity-based cost management system.
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Chapter 9: The Budgeting Process
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Sample Questions
Q1) Arlo Company uses an annual cost formula for overhead of £72,000 + £1.60 for each direct labour hour worked. For the upcoming month, Arlo plans to manufacture 96,000 units. Each unit requires five minutes of direct labour. Arlo's budgeted overhead for the month is
A) £12,800
B) £18,800
C) £84,800
D) £225,600
Q2) Discuss the features of an ideal budgetary process.
Q3) A merchandising firm does NOT prepare which of the following budgets?
A) cash receipts budget
B) production budget
C) sales budget
D) cash payments budget
Q4) Activity-based budgeting
A) focuses on processes that result in output.
B) focuses on eliminating nonvalue-added activities.
C) focuses on the best use of capacity.
D) All of the above are correct.
Q5) Describe activity-based budgeting.
Page 11
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Chapter 10: Management Control Systems
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Sample Questions
Q1) Myopic behaviour occurs when
A) actions improve budgetary performance in the short-run but are harmful in the long run.
B) there is uncertainty.
C) there is focus on immediate costs.
D) actions improve budgetary performance in the distant time horizon.
Q2) A manager of a profit centre:
A) does not control revenues.
B) does not control expenses.
C) does not control investments.
D) only controls revenues.
Q3) The functional-based responsibility accounting model is appropriate for A) relatively stable environments
B) dynamic environments
C) both stable and dynamic environments
D) neither stable nor dynamic environments
Q4) Identify and discuss the key features that a budgetary system should have to encourage managerial, goal-congruent behaviour.
Q5) Define responsibility accounting and describe four types of responsibility centres.
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Chapter 11: Standard Costing and Variance Analysis
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Sample Questions
Q1) Refer to Figure 8. Noelle's variable overhead spending (expenditure) variance would be
A) £7,000 favorable
B) £8,000 unfavorable
C) £15,000 favorable
D) £23,000 unfavorable
Q2) During October, 16,000 direct labour hours were worked at a standard cost of £6 per hour. If the labour rate variance for October was £4,000 unfavorable, the actual cost per labour hour must be
A) £6.25
B) £6.00
C) £5.75
D) none of the above
Q3) Refer to Figure 6. The standard rate for total overhead is
A) £14
B) £13
C) £10
D) £4
Q4) How are standards developed? What is the difference between ideal and currently attainable standards?
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Chapter 12: Divisional Financial Performance Measurement
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Sample Questions
Q1) A firm has £2,000,000 of long-term bonds paying 8 percent interest and £8,000,000 of common stock. The firm is considered to be of average risk with the return to the stockholders estimated to be 14 percent. If the company's tax rate is 40 percent, what is the firm's weighted average cost of capital?
A) 12.80%
B) 12.16%
C) 8.32%
D) none of the above
Q2) a. Identify advantages of a decentralized approach to management.
b. In comparison, identify advantages of a centralized approach to management.
Q3) Dizzy Company's Asian Division employed capital of £250,000 last year. If the weighted average cost of capital is 15 percent and if last year's after-tax income was £50,000, then EVA for the Asian Division last year was
A) £2,500
B) £37,500
C) £12,500
D) £7,500
Q4) Explain why an organization should not use only financial measures to monitor performance.
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Chapter 13: Transfer Pricing in Divisionalized Companies
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Sample Questions
Q1) _____ is when the transfer price is computed equal to a sales price received by the reseller less an appropriate markup.
A) Advance pricing agreement
B) Comparable uncontrolled price approach
C) Cost-plus approach
D) Resale price method
Q2) Transfer pricing is used when:
A) multiple cost centres are conducting business within the company.
B) a decentralized company has profit centres or investment centres.
C) the return on investment ratio cannot be computed.
D) a company is transferring goods to the government.
Q3) The opportunity cost approach to setting a transfer price would set the maximum transfer price as
A) the opportunity cost of the firm as a whole
B) the opportunity cost of the selling division
C) the opportunity cost of the buying division
D) none of the above
Q4) Explain why it is important for the multinational company to separate the evaluation of the manager of the division from the evaluation of the division.
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Chapter 14: Cost Management
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Sample Questions
Q1) _____ are the costs of activities executed to determine if products, processes, and other activities within the firm are in compliance with appropriate environmental standards.
A) Environmental prevention costs
B) Environmental detection costs
C) Environmental internal failure costs
D) Environmental external costs
Q2) Reengineering is another name for
A) product innovation
B) process innovation
C) process improvement
D) product improvement
Q3) For nonvalue-added activities that are unnecessary, the standard quantity is A) one.
B) zero.
C) actual quantity minus standard price.
D) actual quantity plus standard price.
Q4) Describe how activity-based management and activity-based costing systems differ.
Q5) What is kaizen costing? How does activity analysis help reduce costs?
Page 16
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Chapter 15: Strategic Performance Management
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Sample Questions
Q1) Cycle time is the time it takes to
A) collect the account after the sale
B) turn inventory over
C) deliver the product after it is sold
D) produce one unit of product
Q2) Strategic-based performance measures are balanced measures. Give examples of four types of balanced measures.
Q3) _____ are relationships among activities that are performed with a firm's portion of the value chain.
A) External linkages
B) Internal linkages
C) Industrial value chain
D) Both a and b
Q4) _____ are outcome measures that are expressed in monetary terms.
A) Objective measures
B) External measures
C) Financial measures
D) Lag measures
Q5) Describe the basic features of the Balanced Scorecard.
Q6) List three benefits of a value chain perspective.
Page 17
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