Chapter 01
Managerial Accounting and the Business Environment

Multiple Choice Questions
 
1. Day-to-day decision making is most common to which of the following activities managers are expected to carry on in organizations? 
A. Strategy formulation.
B. Directing and motivating.
C. Planning.
D. Budgeting.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-02 The Work of Managers and Their Need for Managerial Accounting Information
 
2. Identifying alternatives and selecting the best among them is part of which of the following activities which managers carry on in organizations? 
A. Controlling.
B. Directing.
C. Planning.
D. Motivating.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning

3. Budgeting is part of which of the following activities managers perform in organizations? 
A. Controlling.
B. Directing.
C. Planning.
D. Motivating.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning
 
4. Obtaining feedback is generally identified most directly with which of these functions of management? 
A. Planning.
B. Directing and motivating.
C. Controlling.
D. Decision making.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-05 Controlling
 
5. Which of the following is part of managing and improving business processes? 
A. Directing
B. Lean production
C. Motivating
D. Planning

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-16 Business Process Management

6. Which is the most common risk management tactic? 
A. Accept the risk.
B. Avoid the risk.
C. Reduce the risk.
D. Share the risk.

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
 
7. Which of the following best describes the function of managerial accounting within an organization? 
A. It has its primary emphasis on the future.
B. It is required by regulatory bodies such as the Ontario Securities Commission.
C. It focuses on the organization as a whole, rather than on the organization's segments.
D. It places more emphasis on precision of data than financial accounting does.

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
 
8. Upon which of the following does managerial accounting place considerable weight? 
A. Generally accepted accounting principles.
B. The financial history of the entity.
C. Ensuring that all transactions are properly recorded.
D. Detailed segment reports about departments, products, and customers.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-13 Segments of an Organization

9. For internal uses, managers are more concerned with receiving information that achieves which of the following standards? 
A. Completely objective and verifiable.
B. Completely accurate and precise.
C. Relevant, flexible, and timely.
D. Relevant, completely accurate, and precise.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-11 Relevance of Data
 
10. Which of the following would be an example of a performance report? 
A. An income statement reporting actual results for the past month.
B. An income statement showing the amounts budgeted for the past month.
C. A balance sheet showing the actual financial position at the end of the past month.
D. A production report showing budgeted and actual production for the past month.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Hard
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-05 Controlling
 
11. Which of the following is NOT one of the three major customer value propositions discussed in the text? 
A. Customer intimacy
B. Discount pricing
C. Operational excellence
D. Product leadership

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management

12. Which of the following is NOT a topic relating to managing and improving business processes? 
A. Lean Production.
B. Corporate Governance.
C. Enterprise Systems.
D. Risk Management.

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-16 Business Process Management
Topic: 01-17 Lean Production
Topic: 01-18 Enterprise Risk Management
 
13. Which one of the following is NOT an example of corporate social responsibility provided to customers? 
A. Safe, high- quality products that are fairly priced.
B. Full disclosure of product related risks.
C. Opportunities for training, promotion and personal development.
D. Easy to use information systems for shopping and tracking orders.

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-21 Corporate Social Responsibility
 
14. Which one of the following is NOT an activity in the planning and control cycle? 
A. Comparing actual to planned performance.
B. Raw materials are released to production far in advance of being needed to ensure no interruptions in work flows due to shortages of raw materials.
C. Formulating long and short-term plans.
D. Measuring performance.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning
Topic: 01-05 Controlling
Topic: 01-06 Decision Making

15. Which of the following is NOT an example of a business risk? 
A. Products harming customers.
B. A website malfunctioning.
C. A customer value proposition.
D. An employee accessing unauthorized information.

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
 
16. Professional accounting body in Canada (CPA) require their members to undertake professional development and/or continuing education. This practice is intended to directly satisfy which of these rules of ethical conduct in line with other code of ethics? 
A. Integrity.
B. Objectivity.
C. Competence.
D. Confidentiality.

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
 
17. Samantha Galloway is a managerial accountant in the accounting department of Mustang Industries, Inc. Samantha has just discovered evidence that some of the corporation's marketing managers have been wrongfully inflating their expense reports in order to obtain higher reimbursements from the firm. According to the Institute of Management Accountants' Standards of Ethical Conduct, what should Samantha do upon discovering this evidence? 
A. Notify the controller.
B. Notify the marketing managers involved.
C. Notify the president of the corporation.
D. Ignore the evidence because she is not part of the Marketing Department.

Blooms: Apply
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Hard
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics

18. Both financial and managerial accounting rely on the same underlying financial data but there are major differences. Managerial Accounting: 
A. emphasizes financial consequences of past activities.
B. emphasizes precision.
C. emphasizes relevance.
D. must follow GAAP.

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
Topic: 01-11 Relevance of Data
Topic: 01-12 Less Emphasis on Precision
 
19. After careful planning, Jammu Manufacturing Corporation has decided to switch to a just-in-time inventory system as a component of the lean thinking model. At the beginning of this switch, Jammu has 30 units of product in inventory. Jammu has 2,000 labour hours available in the first month of this switch. These hours could produce 500 units of product. Customer demand for this first month is 400 units. If just-in-time principles are correctly followed, how many units should Jammu plan to produce in the first month of the switch? 
A. 370
B. 400
C. 430
D. 470

Blooms: Analyze
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Hard
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production

20. Which of the following facets of the lean thinking model is often called just-in-time production? 
A. Identify value in specific products/services.
B. Identify the business process that delivers value.
C. Create a pull system that responds to customer orders.
D. Organize work arrangements around the flow of the business process.

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
 
21. Which of the following groups should be the focal point of a company's strategy? 
A. Employees
B. Board of directors
C. Shareholders
D. Target customers

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Hard
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
 
22. The purpose of IFRS is: 
A. To encourage Strategic planning.
B. To enhance the comparability and clarity of financial information on a global basis.
C. To encourage disclosure of Non-Financial data.
D. To change how management accountants prepare reports.

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-14 Generally Accepted Accounting Principles

23. In Canada, CPA Code of Ethics is an instrument for enforcing professional conduct for its members and comprise the following: 
A. Level of competence, confidentiality, integrity, due care and objectivity
B. Level of competence, confidentiality and integrity
C. Level of competence, confidentiality and objectivity
D. Level of competence, integrity and objectivity

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
 
24. Which of the following is the stakeholder group whose interests are to be directly and formally protected by effective corporate social responsibility? 
A. Customers
B. Creditors
C. All Stakeholders
D. Suppliers

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-21 Corporate Social Responsibility

True / False Questions
 
25. An important part of planning is to identify alternatives and then to select from among the alternatives the one that best meets the organization's objectives. 
TRUE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-03 Planning

26. Lean production is a management approach that organizes resources such as people and machines around the flow of business processes and that produces units only in response to customer orders. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
 
27. Companies should identify foreseeable risks before they occur rather than react to unfortunate events that have already happened. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
 
28. A value chain consists of the major business functions that add value to a company's products and services. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-16 Business Process Management
 
29. Managerial accounting places less emphasis on precision and more emphasis on timeliness of data than financial accounting does. 
TRUE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-12 Less Emphasis on Precision

30. Managerial accounting is NOT governed by generally accepted accounting principles (GAAP). 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-14 Generally Accepted Accounting Principles
Topic: 01-15 Managerial Accounting—Not Mandatory
 
31. In general, accounting data serve both financial accounting and managerial accounting purposes. 
TRUE

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
Topic: 01-11 Relevance of Data
Topic: 01-12 Less Emphasis on Precision
 
32. Product harming customers is NOT a business risk. 
FALSE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management
 
33. Managerial accounting plays a critical role in providing information to management to facilitate implementing and monitoring strategy. 
TRUE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management

34. To reduce the likelihood that employees will engage in undesirable activities that may harm various stakeholders, many companies prepare a formal code of conduct to reflect their values and moral system. 
TRUE

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-20 Ethics
 
35. Emphasis on the future is given equal weight by both managerial accounting and financial accounting. 
FALSE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-10 Emphasis on the Future
 
36. Managerial accounting plays a critical role in providing information to management to facilitate strategy implementation and monitoring. 
TRUE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
 
37. Lean thinking differs from traditional manufacturing methods, which organize work departmentally and encourage those departments to maximize their output even if it exceeds customer demand and bloats inventories. 
TRUE

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production

38. A customer value proposition is essentially a reason for customers to choose a company's products over its competitors' products. 
TRUE

Blooms: Understand
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
 
39. Customer value propositions tend to fall into three broad categories--customer intimacy, operational excellence, and product leadership. 
TRUE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
 
40. Companies that adopt a customer intimacy strategy are in essence saying to their target customers, "The reason you should choose us is because we understand and respond to your individual needs better than our competitors." 
TRUE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Easy
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management
 
41. Companies that choose an operational excellence strategy are in essence saying to their customers, "Choose us rather than our competitors because we strive for zero defects." 
FALSE

Blooms: Remember
CPA Competency: 3.1.1 Evaluates management information requirements.
Difficulty: Medium
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-08 Strategic Management

42. Many organizations use extrinsic incentives to highlight important goals and to motivate employees to achieve them. 
TRUE

Blooms: Understand
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-05 Explain how intrinsic motivation; extrinsic incentives; and cognitive biases affect employee behaviour.
Topic: 01-22 Managing Employees
 
43. The lean approach results in fewer defects, less wasted effort, and quicker customer response times than traditional production methods. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production
 
44. Managerial accounting is not mandatory. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-02 Identify the major differences and similarities between financial and managerial accounting.
Topic: 01-15 Managerial Accounting—Not Mandatory
 
45. Many customers seek to purchase products and services from socially responsible companies. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-04 Explain the nature and importance of ethics for accountants and the role of corporate social responsibility.
Topic: 01-21 Corporate Social Responsibility

46. Lean production is often called just-in-time production. 
TRUE

Blooms: Remember
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Easy
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production

Short Answer Questions

47. You have recently been hired by a manufacturing company. Two days ago, you met with the top management of the company to discuss future strategies for the firm. During the meeting, the president of the company expressed concern about the profitability of the company and the company's ability to compete effectively in the future. You responded to the president's concerns by mentioning some articles you had read in professional accounting journals regarding the lean thinking model. The president responded to your comments by saying that although the lean thinking model sounded interesting, no one in the company was knowledgeable about it. The president then requested that you prepare a brief summary of the lean thinking model for the next strategic planning meeting.

Required:

a. Describe the lean thinking model and how it differs from traditional manufacturing methods
b. List some of the benefits of the lean thinking model. 
a. The lean thinking model is a management approach that organizes resources around the flow of business processes and pulls units through in response to customer orders. The model includes the popular just-in-time production. Lean thinking differs from traditional manufacturing methods, which organize work departmentally and encourage those departments to maximize output even if it exceeds customer demand. Scheduling production in response to customer orders results in minimal inventory.
b. Some of the benefits that accrue from adoption of the lean thinking model are as follows:

1) Lower inventories of raw materials, work in process, and finished goods.
2) Fewer defects
3) Less wasted efforts
5) Quicker customer response times.

Blooms: Apply
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-17 Lean Production

48. How much it costs a company to manufacture a particular product is one of the many questions that reports typically provided by managerial accountants help to answer.

Required:

Comment on the usefulness of a unit product cost information in the preparation of a set of financial statements? 
Unlike a merchandising company, a manufacturing company must calculate the average unit cost of each product it manufactures. As it will be demonstrated in subsequent chapters of the book, this number is essentially the sum of the cost of all the factors of production incurred (that is, raw materials, labour, and capital) divided by the total output. The resulting unit product cost information is not only useful but essential in calculating the cost of units of the product sold required for preparing an income statement and the cost of units of the product not sold (to be reported among the assets on the balance sheet as ending inventory).

Blooms: Analyze
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Hard
Learning Objective: 01-01 Describe the functions performed by managers.
Topic: 01-07 The Planning and Control Cycle
Topic: 01-10 Emphasis on the Future
Topic: 01-11 Relevance of Data
 
49. Provide three examples of common business risks faced by companies. 
Some examples of common business risks include: (1) losing market share to competitors; (2) Web site malfunctioning; (3) employees stealing assets or accessing unauthorized information; and (4) inaccurate budget estimates causing operational problems such as excessive inventory levels or inventory shortages.

Blooms: Apply
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization.
Difficulty: Medium
Learning Objective: 01-03 Explain the basic concepts of lean production and enterprise risk management.
Topic: 01-18 Enterprise Risk Management