Question

ACC 105

Explain why the following sentences are wrong:

1- Employees view budgeting more positively when goals are established for them by senior management.

2- The first budget to be prepared is usually the production budget.

3- A decentralized business organization is one in which all major planning and operating decisions are made by top management.

4- If Division Q's operating income was $60,000 and invested assets amounted to $400,000, the rate of return on investment calculated would be 15%.

5.   The computations required for the net present value method are less than those the computation required for the average rate of return method.

Answer 1

1. Employees view budgeting more positively when they have an opportunity to participate in the budgeting process rather than the goals being set by the senior management.

2. The first budget to be prepared is usually the sales budget. [ Rest budgets are based on the sales budget]

3. A centralized business organization is one in which all major planning and operating decisions are made by top management.

4. Return on investment = Net Income / Invested assets . Hence the ROI does not hold true. Operating income is used to caluclate return on operating assets.

5. The computations required for the net present value method are more than those the computation required for the average rate of return method.

NPV computation format:

	Net Cash inflow	Annuity PV factor [i=r%, n=]	PV factor [i=8%, n=10]	Present value
Present value of annuity	XXX	XXX		XXX
Present value of residual value	0		XXX	0
Total PV of cash inflows				XXX
Initial investment				XXX
Net present value of Plan				XXX

ARR:

Average annual operating income from asset

/

Average amount invested

=

Accounting rate of return