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BEC V > 1-2. Financial and Non-Financial Measures of Performance > Flashcards

1-2. Financial and Non-Financial Measures of Performance Flashcards

1
Q

Ratio analysis: what are metrics?

A
  • Profitability/return
  • Asset utilization
  • Liquidity
  • Debt utilization
  • Market ratios
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2
Q

Ratio analysis: Profitability/Return metrics? what are they used for?

A

*Gross Margin = Revenue - COSG
*Contribution Margin = Revenue - Variable costs
GM used for traditional external reporting.
CM used for planning purpose (internal).

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3
Q

Ratio analysis: Profitability/Return: Gross margin: List traditional IS from sales to EBIT and point manufacturing/non-manufacturing costs.

A 
Sales
(COGS) - Manufacturing cost
=GM
(SGA exp) - Non-manufacturing cost
=EBIT
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4
Q

Ratio analysis: Profitability/Return: Contribution margin: List contribution IS from sales to EBIT and point variable/Fixed costs.

A 
Sales
(Variable) - variable costs
=CM
(Fixed) - fixed costs
= EBIT
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5
Q

Ratio analysis: Operating and Net profit metrics? Useful for what?

A

*Operating profit margin (same as EBIT) = Operating income / Sales
Useful for determining comparable performance without considering potential interest/tax effects (have little to do with operation).

*Profit margin (=return on sales) = NI / Sales
Indicates an ability of revenue to general profits

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6
Q

Ratio analysis: Return on Investment metrics?

A
  • ROI = NI / Total assets

* Return on Equity = NI / Common stockholders’ equity

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7
Q

Ratio analysis: DuPont approach to ROI?

A

DuPont = ROS x Asset turnover
ROS = NI / Sales
Asset turnover = Sales / Total assets

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8
Q

Ratio analysis: Residual Income?

A

RI = Operating income - (Required rate of return x Invested capital)
This is a general form of economic profit rather accounting profit.

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9
Q

Ratio analysis: Asset utilization metrics?

A

*Receivables turnover = Sales on account / Average accounts receivable
*Days’ sales in receivables = Days in year / Accounts receivable turnover
(Average AR / Average sales per day)
Indicate the length of collection period

  • Inventory turnover = COGS / Average inventory
  • Fixed asset turnover = Sales / Average net fixed asset
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10
Q

Ratio analysis: Liquidity metrics?

A
  • Current ratio = Current assets / current liabilities

* Quick or Acid test ratio = (current assets - inventory) / current liabilities)

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11
Q

Ratio analysis: Debt utilization metrics?

A
  • Debt to total assets = Total debt / Total assets
  • Debt to equity = Total debt at the end/ Total owner’s equity at the end
  • Time interest earned = Operating income / Interest expense
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12
Q

Ratio analysis: Market ratio metrics?

A
  • Price earnings (PE) ratio = Market price per share / Earnings per share
  • Market-to-Book ratio = Market value per share / Book value per share
  • *Book value per share = Common stock owner’s equity / # of common shares outstanding
  • Common stock owner’s equity = common stock + ending retained earning)
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13
Q

Risk management: what does managing risks involve?

A
  1. Identifying the different types of risk that are relevant to the company
  2. Identifying ways to mitigate or eliminate that risk to achieve acceptable levels of risk exposure
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14
Q

Risk management: what are 3 types of risks?

A
  • Strategic risk: address LT broad-based exposure related to the overall strategy of the organization
  • Operational risk: ST in nature and includes process risk, shared service risk, foreign/off shore risk, and credit/default risk
  • Market risk: associated with economic events or natural disasters
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15
Q

Risk management: what are other risk management approaches?

A
  • Structuring operating leverage to the company’s advantage
  • Providing contingency planning for disaster recovery and business continuity
  • Using hedging and diversification to offset exposure
  • Using insurance for risk mitigation/elimination
  • Evaluating the level of uncertainty when estimating future costs and revenues
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16
Q

Risk management: Operating leverage: explain the result when there are more variable costs or fixed costs?

A

More VC: reduces the risk of not breaking-even

More FC: increases the contribution margin on sales

17
Q

Risk management: Operating leverage: what is one way to quickly change the dominant portion of risk type?

A

To lease assets rather than purchasing them and vice versa.

18
Q

Risk management: Contingency planning: what are methods for managing disaster recovery?

A
  • Safeguarding equipment
  • Building in redundancy
  • Backup procedures
  • Insurance
19
Q

Risk management: what is hedging used for?

A

To offset future uncertainty with options and futures contracts related to commodities, foreign currency, and other investment exposure to minimize price risk.

20
Q

Risk management: what does diversification do?

A

Reduces general unsystematic and portfolio risk, but does not completely offset risk as hedging does.

21
Q

Risk management: what is insurance used for? what is unique?

A

To decrease exposure to specific, known hazards.
Unique: it deals with pure risk (where there is only a risk of losing) as opposed to speculative risk where gain is also possible.

22
Q

Risk management: what is involved in evaluating uncertainty?

A

Estimating future costs and revenues and maintaining cost control as risk management strategy.

23
Q

Risk management: Evaluating uncertainty: what are methods related to?

A
  • Cost avoidance strategies: attempts to increase revenue using organizational strategy
  • Making distinctions between committed and discretionary costs for effective cost management
24
Q

Risk management: what is diversifiable risk also called?

A

Unsystematic or portfolio risk.

25
Q

Risk management: what is market risk also called?

A

Nondiversifiable risk or systematic risk.

26
Q

Performance improvement tools: what is theory of constraints?

A

Optimization technique: determining where bottlenecks (constraints) exist and optimizing output by relaxing that constraint.

27
Q

Performance improvement tools: theory of constraints: what are examples of causes of constraints?

A

Limited labor hrs, machine hrs, space.

28
Q

Performance improvement tools: theory of constraints: what is the optimization rule for product mix decisions?

A

Maximize the contribution margin per unit of the constrained resources.

29
Q

Performance improvement tools: what is lean manufacturing?

A

Blends the feasters of customer and mass production processes to make a small number of a high variety of products.

30
Q

Performance improvement tools: Lean manufacturing: goals?

A

Increasing quality, reducing waste, and minimizing resource consumption in the process.

31
Q

Performance improvement tools: Lean manufacturing: steps?

A
  • Identify the steps in the value stream
  • Eliminate steps that do not increase customer value
  • Streamline the process
  • Continuously evaluate to reach for perfection
32
Q

Performance improvement tools: Lean manufacturing: what is the environment?

A

Pull-type:

  • Flexible equipment
  • Low setup times
  • Highly-skilled laborers
33
Q

Performance improvement tools: Lean manufacturing: what approach is embedded and for what purpose?

A

The demand flow approach: to mange the process based on continuous flow planning and customer demand.
Originally derived from JIT.

34
Q

Performance improvement tools: what is Six Sigma?

A

A continue improvement approach to systematically reduce defects.

35
Q

Performance improvement tools: what is Six Sigma 5 steps?

A 
Define the process.
Measure the process.
Analyze the process.
Improve the process.
Control the process.
36
Q

What is probability analysis?

A

involves assigning probabilities to various outcomes.

37
Q

What is sensitivity analysis?

A

involves examining the sensitivity of results to changes in significant assumptions.

38
Q

What is decision tree?

A

provides management with a technique for evaluating investments that involve a series of decisions.

39
Q

How is Free Cash flow computed?

A

NOPAT + depreciation - change is working capital - capital expenditure.

BEC V (7 decks)

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