212 Flashcards
why do we use a performance dashboard
performance dashboards allow us to
- signal a potential business problem
- diagnose the potential cause of a business problem
- to add value by improving the performance of the business
allows to test assumptions about cause and effect relationship
red flag signals
1) Earnings problems - has income from continuing operations and net income decreased significantly for several years in a row? Has income turned into a loss? This may be okay for a company in a cyclical industry, such as an airline or a home builder, but most companies cannot survive consecutive loss years
2) Decreased Cash Flow. Cash flow validates earnings. Is cash flow from operations consistently lower than net income? Are the sales of property, plant, and equipment a major source of cash? If so, the company may be facing a cash shortage.
3) Too Much Debt. How does the company’s debt ratio compare to that of major competitors and to the industry average? If the debt ratio is much higher than average, the company may be unable to pay debts during tough times.
4) Inability to Collect Receivables. Are days’ sales in receivables growing faster than for other companies in the industry? A cash shortage may be looming.
5) Buildup of Inventories. Is inventory turnover slowing down? If so, the company may be unable to move products, or it may be overstating inventory. Recall that one of the easiest ways to overstate net income is to overstate ending inventory.
6) Trends of Sales, Inventory, and Receivables. Sales, receivables, and inventory generally move together. Increased sales lead to higher receivables and require more inventory to meet demand. Strange movements among these items may spell trouble.”
when we assess performance - what questions do we ask?
Where’s the business today?
How is the business doing/performing?
What next steps improve performance?
separate entity function
separate entity assumption draws a clear boundary around the business activities of the reporting entity and only activities within the boundary are reported in the entity’s financial statements
define equity
IFRS defines equity as the residual interest in the assets of the entity after deducting all its liabilities. The residual interest belongs to the owners of the entity (ex. all shareholders who won common shares in TSLA)
book value per share of common stock
book value per share of common stock = shareholders equity / average number of common shares outstanding
what does a shareholder own
a shareholder owns the right to benefits in the future that provide a return (economic benefit) on the investment made when he or she purchased the share (past event)
financial results metrics:
Price/Earnings Ratio (Multiple)
Dividend Yield
Book Value per Share of Common Stock
Price/Earnings Ratio (Multiple) = Market price per common share ÷ Earnings per share
Dividend Yield = Dividend per common share ÷ Market price per common share
Book Value per Share of Common Stock = (Total Shareholder’s Equity - Preferred Shareholder’s Equity) ÷ Weighted average number of common shares outstanding
product vs period costs
product - all costs related to purchasing or producing a good. Product costs are often referred to as inventoriable costs because their costs are recorded on the balance sheet as inventory before the units are sold to customers
period - all other costs that are NOT related to purchasing or producing a good. They are not recorded on the balance sheet
