The Following Question Relates to PQR,which Has the Following Ratios

question 34

Multiple Choice

The following question relates to PQR,which has the following ratios: return on assets, (ROA) 10 per cent;return on equity (ROE) 12 per cent;and current ratio (CR) of 1.8:1.
-The company changed accounting methods by deciding to capitalise rather than expense a research and development outlay.This will:

• A) increase ROE,but have no effect on ROA and CR.
• B) increase ROA,ROE and CR.
• C) increase ROA and ROE,but have no effect on CR.
• D) have no effect on ROA,ROE or CR.

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Definitions:

Absorption Costing

An accounting method that includes all manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) in the cost of a product.

Product Costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Also see Inventoriable costs.

Manufacturing Costs

Expenses directly related to the production of goods, including direct materials, direct labor, and manufacturing overhead.

Contribution Margin

The difference between sales revenue and variable costs of a product or service, used to cover fixed costs and generate profits.