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MANAGEMENT ACCOUNTING: AN OVERVIEW 16

Case Analysis

Case 1.

You have just discovered that James Torres, a manager of Manila division has made up fictitious revenues and booked
some of them in this period and deferred some of them to the next period. As a result, James has been able to achieve a
very large net income number for his division for this period and more than likely the next period as well. What are the
terms used for James’ methods and are they illegal?

Case 2

As a manager at the P3 Company you have just found out that the vice-president of the company has secretly engaged in
selling technical specifications for your new, patent-pending, product VidOne, to AZ Products, your leading competitor.
What do you do?

Case 3

Each year, the president of Quark Electronics selects a single performance measure, and offers significant financial
bonuses to all key employees if the company achieves a 10 percent improvement on the measure in comparison to the
prior year. He recently expressed the opinion that “this focuses my managers on a single, specific target and gets them all
working together to achieve a major objective that will increase shareholder value.”

Pilar Hernandez is a new member of the company’s board of directors, and she has begun to question the president’s
approach to rewarding performance. In particular, she is concerned that placing too much emphasis on a single
performance measure may lead to managers to take actions that increase performance in terms of the measure but
decrease the value of the firm. Is this possible?

Required:

a. What negative consequence might occur if the performance measure is sales to new customers ÷ total sales in
the current year versus the prior year? (Note: To receive a bonus, managers would need to increase this ratio
compared with the prior year.)
b. What negative consequence might occur if the performance measure is cost of goods sold ÷ sales in the current
year versus the prior year? (Note: To receive a bonus, managers would need to decrease this ratio compared
with the prior year.)
c. What negative consequence might occur if the performance measure is selling and administrative expense / sales
in the current year versus the prior year? (Note: To receive a bonus, managers would need to decrease this ratio
compared with the prior year.)

Case 4

Happyville, Inc., operates a chain of department stores located in the northwest. The first store began operations in 1965,
and the company has steadily grown to its present size of 44 stores. Two years ago, the board of directors of Happyville
approved a large-scale remodeling of its stores to attract a more upscale clientele.

Before finalizing these plans, two stores were remodeled as a test. Lisa Perez, assistant controller, was asked to oversee
the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the
sales growth and profitability of these stores. While completing the financial reports, Perez discovered a sizable inventory
of outdated goods that should have been discounted for sale or returned to the manufacturer. She discussed the situation
with her management colleagues; the consensus was to ignore reporting this inventory as obsolete, since reporting it
would diminish the financial results and their bonuses.

Required:

1. According to the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial
Management, would it be ethical for Perez not to report the inventory as obsolete?
2. Would it be easy for Perez to take the ethical action in this situation?

MULTIPLE CHOICE QUESTIONS

1. Which of the following statement is true?


a. Management accounting information focuses on external reporting
b. The balance sheet, income statement and statement of cash flows are used for financial accounting but not
for management accounting
c. Financial accounting is broader in scope than management accounting
d. Modern cost accounting plays a significant role in management decision making
MANAGEMENT ACCOUNTING: AN OVERVIEW 17
2. Which of the following statements is false?
a. Cost accounting measures and reports short-term, long-term financial, and nonfinancial information
b. Cost management provides information that helps increase value for customers
c. All strategies should be evaluated regarding the resources and capabilities of the company
d. A good cost accounting system is narrowly focused on a continuous reduction of costs
3. Which of the following is correct?
a. The best-designed strategies are valuable whether or not they are effectively implemented
b. To take advantage of changing market opportunities, the annual budget should be strictly enforced
c. Linking rewards to performance is a major deterrent to good management performance
d. An important strategic decision is making the correct investments in productive assets
4. All of the following statements are true except
a. A budget is a tool used to plan and express strategy
b. Financial accounting reports financial and nonfinancial information that helps managers implement company
strategies
c. Feedback links planning and control
d. Control includes deciding what feedback to provide that will help with future decision making

5. All of the following statements are false except


a. Attention-directing activities should focus on cost-reduction opportunities, and not on value-adding
opportunities
b. For strategic decisions, scorekeeping is the most prominent role played by management accounting
c. A budget may be used as a planning tool, but not as a control tool
d. Management accountants often are simultaneously doing problem-solving, scorekeeping, and attention-
directing activities
6. Management accounting
a. Focuses on estimating future revenues, costs, and other measures to forecast activities and their results
b. Provides information about the company as a whole
c. Reports information that has occurred in the past that is verifiable and reliable
d. Provides information that is generally available only on a quarterly or annual basis
7. Financial accounting
a. Focuses on the future and includes activities such as preparing next year’s operating budget
b. Must comply with GAAP (generally accepted accounting principles)
c. Reports include detailed information on the various operating segments of the business such as product lines
or departments
d. Is prepared for the use of department heads and other employees
8. The person MOST likely to use management accounting information is a(n)
a. Banker evaluating a credit application c. Governmental taxing authority
b. Shareholder evaluating a stock investment d. Assembly department supervisor
9. Which of the following descriptors refers to management accounting information?
a. It is verifiable and reliable c. It is prepared for shareholders
b. It is driven by rules d. It provides reasonable and timely estimates
10. Which of the following groups would be LEAST likely to receive detailed management accounting reports?
a. Stockholders c. Production supervisors
b. Sales representatives d. Managers
11. Management accounting information includes
a. Tabulated results of customer satisfaction surveys
b. The cost of producing a product
c. The percentage of units produced that are defective
d. All of the above
12. Which of the following types of information are used in management accounting?
a. Financial information c. Information focused on the long term
b. Nonfinancial information d. All of the above
13. Management accounting includes
a. Implementing strategies c. Preparing special studies and forecasts
b. Developing budgets d. All of the above
14. Financial accounting is concerned PRIMARILY with
a. External reporting to investors, creditors, and government authorities
b. Cost planning and cost controls
c. Profitability analysis
d. Providing information for strategic and tactical decisions
MANAGEMENT ACCOUNTING: AN OVERVIEW 17
15. Financial accounting provides a historical perspective, whereas management accounting emphasizes
a. The future c. A current perspective
b. Past transactions d. Reports to shareholders
16. Strategy specifies
a. How an organization matches its own capabilities with the opportunities in the marketplace
b. Standard procedures to ensure quality products
c. Incremental changes for improved performance
d. The demand created for products and services
17. Control includes
a. Implementing planning decisions
b. Evaluating performance
c. Providing feedback to help with future decision making
d. All of the above
18. Linking rewards to performance
a. Helps to motivate managers c. Should only be based on financial information
b. Allows companies to charge premium prices d. Does all of the above

19. Control measures should


a. Be set and not changed until the next budget cycle
b. Be flexible to allow for employees who are slackers
c. Be kept confidential from employees so that competitors don’t have an opportunity to gain a competitive
advantage
d. Be linked by feedback to planning
20. For control decisions, emphasis is placed on the ________________ role(s) of management accounting
a. Problem-solving c. Attention-directing
b. Scorekeeping d. Both b and c

21. ________________ means reporting and interpreting information that helps managers to focus on operating
problems, imperfections, inefficiencies, and opportunities
a. Scorekeeping c. Problem solving
b. Attention directing d. None of the above

22. Management accounting is considered successful when it


a. Helps creditors evaluate the company’s performance
b. Helps managers improve their decisions
c. Is accurate
d. Is relevant and reported annually
23. The Institute of Management Accountants (IMA)
a. Is a professional organization of management accountants
b. Is a professional organization of financial accountants
c. Issues standards for management accounting
d. Issues standards for financial accounting
24. Line management includes
a. Manufacturing managers c. Information technology managers
b. Human resource managers d. Management accounting managers

25. Staff management includes


a. Manufacturing managers c. Purchasing managers
b. Human resource managers d. Distribution managers
26. Responsibility of CFO include all EXCEPT
a. Providing financial reports to shareholders c. Investing in new equipment
b. Managing short term and long term financing d. Preparing tax returns
27. The Standards of Ethical Conduct for management accountants include concepts related to
a. Competence, performance, integrity, and reporting
b. Competence, confidentiality, integrity and objectivity
c. Experience, integrity, reporting, and objectivity
d. None of the above as ethical issues do not affect management accountants

28. Ethical challenges for management accountants include


a. Whether to accept gifts from suppliers, knowing it is an effort to indirectly influence decisions
b. Whether to report unfavorable department information that may result in unfavorable consequences for a
friend
MANAGEMENT ACCOUNTING: AN OVERVIEW 17
c. Whether to file a tax return this year
d. Both a and b

29. If a financial manager/ management accountant has a problem in identifying unethical behavior or resolving an ethical
conflict, the first action (s)he should normally take is to
a. Consult the board of directors
b. Discuss the problem with his/her immediate superior
c. Notify the appropriate law enforcement
d. Resign from the company
30. Katrina is a financial manager who has discovered that her company is violating environmental regulations. If her
immediate superior is involved, her appropriate action is to
a. Do nothing since she has a duty of loyalty to the organization
b. Consult the audit committee
c. Present the matter to the next higher managerial level
d. Confront her immediate superior
31. If financial manager/ management accountant discovers unethical conduct in his/her organization and fails to act,
(s)he will be in violation of which ethical standard(s)?
a. “Actively or passively subvert the attainment of the organization’s legitimate and ethical objectives.”
b. “Communicate unfavorable as well as favorable information.”
c. “Condone the commission of such acts by others within their organizations.”
d. All of the answers are correct
32. Corporate social responsibility is
a. Effectively enforced through the controls envisioned by classical economics
b. The obligation to shareholders to earn a profit
c. The duty to embrace service to the public interest
d. The obligation to serve long-term, organizational interests

33. A common argument against corporate involvement in socially responsible behavior is that
a. It encourages government intrusion in decision making
b. As a legal person, a corporation, is accountable for its conduct
c. It creates goodwill
d. In a competitive market, such behavior incurs costs that place the company at a disadvantage
34. Integrity is an ethical requirement for all financial managers/ management accountants. One aspect of integrity
requires
a. Performance of professional duties in accordance with applicable laws
b. Avoidance of conflict of interest
c. Refraining from improper use of inside information
d. Maintenance of an appropriate level of professional competence
35. A financial manager/ management accountant discovers a problem that could mislead users of the firm’s financial
data and has informed his/her immediate superior. S(he) should report the circumstances to the audit committee
and/or the board of directors only if
a. The immediate superior, who reports to the chief executive officer, knows about the situation but refuses to
correct it
b. The immediate superior assures the financial manager/ management accountant that the problem will be
resolved
c. The immediate superior reports the situation to his/her superior
d. The immediate superior, the firm’s chief executive officer, knows about the situation but refuses to correct it
36. In which situation is a financial manager/ management accountant permitted to communicate confidential information
to individuals or authorities outside the firm?
a. There is an ethical conflict and the board has refused to take action
b. Such communication is legally prescribed
c. The financial manager/ management accountant knowingly communicates the information indirectly through a
subordinate
d. An officer at the financial manager/ management accountant’s bank has requested information on a
transaction that could influence the firm’s stock price

37. Which ethical standard is most clearly violated if a financial manager/ management accountant knows of a problem
that could mislead users but does nothing about it?
a. Competence c. Objectivity
b. Legality d. Confidentiality
MANAGEMENT ACCOUNTING: AN OVERVIEW 17
38. __________________produces information that helps workers, managers, and executives in organizations make
better decisions.
a. Governmental accounting c. Auditing
b. Management accounting d. Financial accounting
39. _______________ is the recognition and evaluation of business transactions and other economic events for
appropriate accounting action.
a. Identification c. Communication
b. Analysis d. Evaluating
40. _______________ is the quantification of business transactions or other economic events that have occurred or
forecasts of those that may occur
a. Accumulation c. Measurement
b. External reporting d. Internal reporting
41. _______________ is a determination of the reasons for the reported activity and its relationship with other economic
events and circumstances.
a. Analysis c. Evaluation
b. Measurement d. Accumulation

42. _______________ includes strategic, tactical and operating aspects


a. Controlling c. Planning
b. Communication d. Evaluating
43. _______________ judges implications of historical and expected events and helps to choose the optimum course of
action
a. Controlling c. Planning
b. Communication d. Evaluating

44. Which of the following is a basic feature of a financial accounting system?


a. Internal audience c. Subjective information
b. Historical data d. Disaggregate information
45. Which of the following is NOT a basic feature of a financial accounting sytem?
a. Objective information c. Future oriented reports
b. Reports on past performance d. Highly aggregated data

46. Which of the following is a basic feature of a managerial accounting system?


a. External audience c. Objective data only
b. Reports are current and future oriented d. Reports on the entire organization
47. Which of the following is NOT a basic feature of a managerial accounting system?
a. Financial measures only c. Internal audience
b. Subjective information d. Informs local decision and actions
48. Which of the following is a basic feature of a managerial accounting system?
a. The scope tends to be highly aggregate.
b. There are no regulations governing the reports
c. The reports are generally delayed and historical
d. The audience tends to be stockholders, creditors and tax authorities
49. Which of the following groups would be LEAST likely to receive detailed management accounting reports?
a. Management accountants c. Stockholders
b. Scientists and engineers d. Managers
50. _____________ indicate whether the organization is creating long-term value and profitability.
a. Strategic information c. Net income
b. ROI d. Critical success factors
51. _____________ is when a firm compares itself with the best practice of competitors or other comparable
organizations.
a. Process improvement c. Employee empowerment
b. Benchmarking d. Total quality philosophy

52. Which of the following is NOT a function of a management accounting system?


a. Operating control c. Management control
b. Product and customer costing d. Financial reporting
53. Which of the following functions provides feedback information about the efficiency of tasks performed?
a. Operating control c. Management control
b. Product and customer costing d. Financial reporting
MANAGEMENT ACCOUNTING: AN OVERVIEW 16
54. Which of the following functions provides information on the performance of managers and operating units?
a. Operating control c. Management control
b. Product and customer costing d. Financial reporting
55. Which of the following is NOT a role of management accounting information in operating control?
a. To provide feedback information about quality
b. To provide feedback information about timeliness
c. To provide feedback information about the efficiency of tasks performed
d. To provide performance measures for decentralized organizational units
56. Which of the following is NOT a role of management accounting information in product and customer costing?
a. To measure the cost of resources used to produce a service
b. To assess the profitability of the organization’s services by linking resources generated
c. To provide feedback information about the quality, timeliness, and efficiency of tasks performed
d. To assess customer profitability for a particular segment
57. An organization develops a code of ethics because
a. It is required by law
b. The Chief Executive Officer demands it
c. It wishes to reduce ethical conflicts by avoiding ambiguity or misunderstandings
d. It wishes to punish those whose ethical standards are different from its own
58. If an individual faces a conflict between the organization’s stated and practiced values experts recommend that
a. The individual resign immediately and call the media
b. The individual call the media
c. Delay action and work with respected leaders in the organization
d. Delay action and hope the problem goes away
59. The elements of an ethical control system include the following EXCEPT
a. A reward system for tuning in those who violate the ethical code
b. A statement of the organization’s values and code of ethics
c. An ongoing internal audit of the ethical control system
d. A statement of the employee’s ethical responsibilities
60. Certified Management Accountants are required to adhere to the following ethical standards, EXCEPT
a. Competence c. Integrity
b. Ingenuity d. Objectivity