MS1-MANAGEMENT ACCOUNTING

FINAL EXAMINATION
1ST SEM AY 2016-2017
Name:

_________________________________________

Score: _______________________

Schedule & Professor:_____________________________ Yr. & Section: __________________

Test I. MATCHING TYPE. UNDERSTAND the statements in column A by recalling facts, terms
and basic concepts and match with answers in column B. Write the ONLY THE LETTER of your
answer before each number. AVOID ERASURES.
COLUMN A
It refers to the net cash outflows, after tax considerations and A.
opportunity costs that are normally paid or incurred by
investors in relation to the investing transaction. It is the
difference between the cash outflows and the cash inflows
relating to the investment opportunity.
This refers to the net income (after tax) expected to be earned C.
from the project being evaluated.

COLUMN B
Payback Period

It is computed by deducting from the cash inflows to be E.

generated from operating the project all the cash outflows to
be incurred for the projects operations. Non-cash items, such
as depreciation, are excluded from the cash outflows, though
these items are considered in the determination of income tax.
Refers to the length of time required by the project to return G.
the initial cost of investment.

Net Cost of
Investment

It is a variation of payback period method wherein cash

recoveries include not only the operating cash inflows but also
the estimated salvage value or the proceeds from sale at the
end of each year of the life of the project.
Under this method, all cash inflows and outflows related to the K.
investment project are discounted at a minimum acceptable
rate of return which, in most cases, is the firms cost of capital.
Under this method, the net return used is the accounting net M.
income which is based on the accrual concept of accounting. It
uses either the original or initial investment as the
denominator or the average cost of investment.
It is the ratio of the total net present value of cash inflows to O.
the net cost of investment.

Annual
Operating Cash
Inflows

17.

It is the ratio of the present value of cash inflows to the present Q.

value of cash outflows

Accounting
Rate of Return

19.

It is the process of identifying, evaluating, planning and S.

financing capital investment projects of an organization.

Net Present
Value

1.

3.
5.

7.
9.

11.

13.

15.

Bail-out Method

Accounting Net
Income

Capital
Budgeting
Profitability
Index

NPV Index

Test II. MULTIPLE CHOICE. EVALUATE each statement and its choices then, APPLY your
knowledge by selecting the best answer and write the letter only on the space provided before
each number.
1. The capital budget is a(n)
A. Plan to insure that there are sufficient funds available for the operating needs of
the company
B. Exercise that sets the long-range goals of the company including the consideration

of external influences
C. Plan that coordinates and communicates a companys plan for the coming year to
all departments and divisions
D. Plan that assesses the long-term needs of the company for plant and equipment
purchases
2. A capital budgeting techniques are least likely to be used in evaluating the
A. Acquisition of new aircraft by a cargo company
B. Design and implementation of a major advertising program
C. Adoption of a new method of allocating non-traceable cost to product lines
D. Sale by conglomerate of an unprofitable division
3. In capital expenditures decisions, the following are relevant in estimating operating
costs except
A. Future costs
C. Differential costs
B. Cash costs
D. Historical costs
4. All of the following are methods that aid management in analyzing the expected result
of capital budgeting decisions, except
A. Accrual accounting rate of return
C. Future cash flow
B. Payback method
D. Discounted cash flow rate of return
5. As capital budgeting technique, the payback period considers depreciation expense
(DE) and time value of money (TVM) as follows:
A. DE, relevant, and TVM, relevant
C. DE, irrelevant, and TVM, relevant
B. DE, irrelevant, and TVM, irrelevant
D. DE, relevant, and TVM, irrelevant
7. Which one of the following statements about payback method of investments analysis
is correct. The payback method
A. Does not consider the time value of money
B. Considers cash flows after the payback has been reached
C. Uses discounted cash flow techniques
D. Is rarely used in practice
9. Depreciation tax shield
A. The expense caused by depreciation
B. The cash provided by recording
depreciation

C. A reduction in income tax

D. As after-tax cash flow

10.Which of the following is necessary in order to calculate the payback period for a
project?
A. Useful life
C. Net present value
B. Minimum desired rate of return
D. Annual cash flow
11.Karen Company is considering replacing an old machine with a new machine. Which of
the following items is economically relevant to Karens decisions? Ignore Income Tax
consideration.
A. Carrying amount of old machine Yes
Disposal value of new machine Yes
B. Carrying amount of old machine Yes
Disposal value of new machine No
C. Carrying amount of old machine No
Disposal value of new machine Yes
D. Carrying amount of old machine No
Disposal value of new machine No
12.Jasper Company has a payback goal of 3 years on new accounting equipment
acquisitions. A new sorter is being evaluated that cost P450,000 and has a 5-year life.
Straight-line depreciation will be used; no salvage value is anticipated. Jasper is
subject to a 40% income tax rate. To meet the companys payback goal, the sorter
must generate reduction in annual cash operating costs of
A. P 60,000
C. P 150,000
B. P 100,000
D. P 190,000

14.A company considers a project that will generate cash sales of P50,000 per year. Fixed
costs will be P10,000 per year, variable costs will be 40% of sales and depreciation of
the equipment in the project will be P5,000 per year. Taxes are 40%. The expected
annual cash flow to the company resulting from the project is
A. P 15,000
C. P 19,000
B. P 9,000
D. P 14,000
15.A machine costing P1,000 produces total cash inflows of P1,400 over 4 years.
Determine the payback period given the following cash flows:
Year
1
2
3
4

After tax Cash

Flows
P 400
300
500
200

A. 2 years
B. 2.60 years

Cumulative Cash
Flows
P 400
700
1,200
1,400
C. 2.86 years
D. 3 years

17.Which of the following statements concerning cash flow determination for capital
budgeting purposes in not correct?
A. Tax depreciation must be considered because it affects cash payment for taxes
B. Book depreciation is relevant because it affects net income
C. Net working capital should be included in cash flow forecasts
D. Relevant opportunity costs should be included in cash flow forecasts
18.Given these data:
Net after tax inflows are: P24,000 for year 1, P30,000 for year 2, P36,000 for year
3, and P30,000 for year 4
Initial investment outlay is P60,000
Cost of capital is 18%
Determine the payback period
A. 2.5 years
B. 2.17 years

C. 3.00 years
D. 3.17 years

19.The payback reciprocal can be used to approximate a projects

A. Net present value
B. Accounting rate of return of the cash flow pattern is relatively stable
C. Payback period
D. Internal rate of return if the cash flow pattern is relatively stable
20.The bailout payback method
A. Incorporate the time value of money
B. Equals the recovery period from normal operations
C. Eliminates disposal value from the payback calculation
D. Measures the risk is a project is terminated
21.The following statements refer to the accounting rate of return (ARR)
(1) The ARR is based on the actual basis, not cash basis
(2) The ARR does not consider the time value of money
(3) The profitability of the project is not considered
From the above statements, which are considered limitations of the ARR concept?
A. Statements 2 and 3 only
C. All the 3 statements
B. Statements 3 and 1 only
D. Statements 2 and 1 only
22.A capital budgeting method that provides a rough approximation of an investments
profitability as measured with net income from the income statement is known as:
B. Average rate of return method
D. Payback period method
C. Net present value method
E. Internal rate of return method

23.The Hablot Inc. is planning to spend P600,000 for a machine that it will depreciate on
a straight-line basis over a ten year period with no terminal disposal price. The
machine will generate cash flow from operations of P120,000 a year. Ignoring income
taxes, what is the accounting rate of return on the net initial investment?
A. 5%
C. 10%
B. 12%
D. 15%
25.The Folk Company is planning to purchase a new machine, which it will depreciate on
a straight-line basis over a 10 year period with no salvage value and a full years
depreciation in the year of acquisition. The new machine is expected to produce cash
flow from operations, net of income taxes, of P66,000 a year in each of the next ten
years. The accounting (book value) rate of return on the initial investment is expected
to be 12%. How much will the new machine cost?
A. P 300,000
C. P 660,000
B. P 550,000
D. P 792,000
26.The method that divides a projects annual after tax net income by the average
investment cost to measure the estimated performance of a capital investment is the
A. Internal rate of return method
C. Payback method
B. Accounting rate of return method
D. Net present value (NPV) method
28.Which of the following methods measures the cash inflows and outflows of a project as
if they occurred at a single point in time?
B. Cash flow based payback method
D. Payback method
C. Capital budgeting
E. Discounted cash flow
29.All
A.
B.
C.
D.

of the following items are included in discounted cash flow analysis except
Future operating cash savings
The disposal prices of the current and future assets
The future assets depreciation
The tax effects of future asset depreciation

30.The net present value of a proposed project is negative therefore, the discount rate
must be
A. Less than the projects internal rate
C. Greater than the firms cost of equity
of return
D. Greater than the projects internal rate of
B. Less than the risk free rate
return
31.The capital budgeting techniques known as net present value uses
Cash flow over the
life of the project
A. No
B. No

Time value of
money
Yes
No

Cash flow over

the life of the
project
C. Yes
D. Yes

Time value of
money
No
Yes

33.On January 1, Studley Company purchased a new machine for P100,000 to be

depreciated over 5 years. It will have no salvage value at the end of 5 years. For book
and tax purposes, depreciation will be P20,000 per year. The machine is expected to
produce annual cash flow from operations, before income taxes, of P40,000. Assume
that Studley uses a discount rate of 12% and that its income tax rate will be 40% for
all years. The present value of P1 at 12% for five periods is 0.57, and the present
value of an ordinary annuity of P1 at 12% for five periods is 3.61. The NPV of the
machine should be
A. P 15,520 positive
C. P 60,000 positive
B. P 15,520 negative
D. P 25,600 negative
34.The technique that reflects the time value of money and is calculated by dividing the
present value of the future net after-tax cash inflows that have been discounted at the
desired cost of capital by the initial cash outlay for an investment is the
A. Net present value method
C. Accounting rate of return method
B. Capital rationing method
D. Profitability index method
35.Which project (s) should Capital Investment, Inc. undertake during the upcoming year

assuming it has no budget restrictions?

A. All of the projects
B. Project 1, 2 and 3

C. Project 2, 3 and 4
D. Project 1, 3 and 4

36.Which of the project (s) should Capital Investment, Inc. undertake during the
upcoming year if it has only P600,000 of funds available?
A. Projects 1 and 3
C. Projects 2 and 3
B. Project 2, 3 and 4
D. Projects 3 and 4
37.Which project (s) should Capital Investment Inc. undertake during the upcoming year if
it has only P300,000 of capital funds available?
A. Project 1
C. Projects 3 and 4
B. Project 2, 3 and 4
D. Project 3
Test III. PROBLEM SOLVING. APPLY your knowledge in Financial Statement Analysis and Capital
Budgeting to solve the following problems. SHOW YOUR PROCESSES.
Problem 1. Monica Company plans to replace its machinery with an new one costing P200,000
with an estimated useful life of 10 years without scrap value. The old machinery has a book
value of P20,000 and can be sold for P15,000. The acquisition of the new machinery will yield an
annual cash savings of P45,000 before income tax. Income tax rate is 35%.
Requirements:
1. Net investment on the new machine
2. Net income (after tax)
3. Annual net cash inflows expected from the new machine
4. Payback period
5. Payback reciprocal
6. Accounting rate of return based on:
a. Original investment
b. Average investment
7. Net present value, assuming that the minimum desired rate of return is 15%
8. Profitability index
9. Net Present Value Index
Problem 2. William and Co. has to choose of the two alternative machines. Calculate the
Payback Period of both machines and suggest the profitable machine:
Cost of Machine
Working Life in
Years
Profit before tax:
1st year
2nd year
3rd year
4th year
5th year
Rate of income
tax

Machine X
200,000
5

Machine Y
250,000
5

60,000
70,000
80,000
60,000
40,000
50%

80,000
100,000
80,000
70,000
60,000
50%

Prepared by:
Nikki G. Estores, CPA, MBA
Balidio, CPA, MBA
Faculty In Charge
Approved by:

Benrie James Nufable, MSIT

Dean,SBIT

Checked by:

Joel T.

Program Head