Question

The American Girl is a division of the Petty Company. Last year the division had sales of $21,520,000, average operating assets of $8,000,000 and net operating income of $538,000. The company’s minimum required rate of return is 18%. Which of the following statements is true.

1)	Based on ROI, the manager is performing acceptable.

2)	Based on Residual Income, the manager is performing acceptable.

3)	The manager is performing unacceptable based on ROI and Residual Income.

4)	None of the above.

Which of the following would not be included in the cash budget?

1)	Cash disbursements for inventory purchases.

2)	Cash collections for the month.

3)	Cash dividends distributed.

4)	Cash payment made in advance for insurance coverage for the following year.

5)	None of the above. All items would be included in a cash budget.

A cash budget includes:

1)	All cash disbursements and all cash receipts.

2)	Only cash receipts.

3)	Only cash disbursements.

4)	Depreciation on equipment purchased during the current year.

Answer 1

• [1]
  Correct Answer = Option #3
  The manager is performing unacceptable based on ROI and Residual Income.
  This is because:
  >ROI = $ 538000 / 8000000 = 6.73% which is below 18%
  >Residual income = $538000 – (8000000 x 18%) = $ (902,000) Negative.
• [2]
  Correct Answer = Option #5
  None of the above. All items would be included in a cash budget.
  Cash Budget contains all cash receipts and cash payments.
  All options are either cash receipts or cash payments.
• [3]
  Correct Answer = Option #1
  All cash disbursements and all cash receipts will be included in a cash budget.