404 Final Flashcards
Cost Center
control over costs but not revenue,
overall profit or investments
Revenue Center
control over revenue but not
costs, overall profit or investments
Profit Center
control over revenue and cost
Investment or Business Unit Center
control over profit and investments
Responsibility Centers
cost, revenue, profit, and investment
Jenkins Stupid Fucking Golden Four of Effective Delegation
- Communicate Expectations
- Provide Resources
- Monitor Performance
- Provide Feedback
What is Net Operating Income?
EBIT
What is Average Operating Assets?
cash, A/R, inventory, PPE
What is Transfer Pricing?
evenly distributing funds, avoids suboptimization by motivating managers to act in the best interests of the company
What are the four aspects of Cost of Quality?
- quality of conformance
- prevention and appraisal costs
- internal failure costs
- external failure costs
Explain Quality of Conformance
costs incurred to prevent defects or that result from defects in products
Explain Prevention and Appraisal
prevention supports activities that tries to reduce number of defects
appraisal is incurred to identify defective products before the products are shipped
Explain Internal Failure Costs
incurred as a result of identifying defects before they are shipped
Explain External Failure Costs
incurred as a result of defective products being delivered to customers
Differential Analysis
focusing on the costs and benefits that differ between the alternatives, everything else is irrelevant
Relevant Cost
cost that differs between alternatives
Relevant Benefit
benefit that differs between alternatives
differential cost
future costs that differ between any two alternatives
differential revenue
future revenue that differs between any two alternatives
incremental cost
increase in cost between two alternatives
avoidable cost
cost that can be eliminated by choosing one alternative over another
Sunk Costs
always irrelevant, cost has already been incurred and cannot be changed
Opportunity Costs
must be considered in differential analysis, potential benefit that is given up when another is selected
Rising Star
( high growth and high share ), invest
Cash Cow
( low growth and high share ) milk it and use cash to reinvest
Question Mark
( high growth and low share )
Dog
( low growth and low share ), need exit strategy
Vertical Integration
common ownership of activities in consumer value chain
Make or Buy Choice
companies with vertical integration can choose to make something or buy it
Special Order
one time order that is not considered part of normal ongoing business, must focus on incremental costs and benefits
volume-trade off decision
made when companies do not have enough capacity to produce all of their products
bottleneck
machine is the constraint, increase in the machines capacity leads to increased sales
joint-products
two or more products are produced from a single raw-material
split-off point
the point at which joint-products can be considered two separate products
Time Value of Money
A dollar today is worth more than a dollar tmrw because you have the opportunity to invest it
Simple Interest
interest is only compounded on the principal
Compound Interest
interest from a prior period is added to principal and interest is calculated for both
Opportunity Cost
rate of return you could earn on an investment of similar risk
Discounting
finding the present value of a future cash flow
Annuity
series of consecutive payments of equal amounts, helps compare investment decisions
Horizontal Analysis
shows changes between years in the financial data (trend analysis)
comparative form
What does quantifying dollar changes highlight?
economic changes
What does quantifying percentage changes highlight?
unusual changes
Vertical Analysis
focuses on relationships among financial statements at a given time
Common-Size Financial Statements
part of vertical analysis, each financial statement is expressed as a %, usually a % of sales
What is Financial Leverage?
Magnify ROA with inexpensive liabilities to provide a higher rate of return to our shareholders
Profit margin on sales (ROS)
how efficiently a company turns sales into profits
Gross profit percentage
evaluates profitability
Return on assets
shows how much profit a company generates from its assets
return on net worth (ROE)
how well it generates profits from shareholder investments
helps decide whether you should invest
Earnings per Share
indicates how much profit a company makes per stock share
Earnings per Share (Fully diluted)
indicates how much money a company makes per stock share, including all potential shares
Accounts receivable turnover
how quickly a company collects its (AR) and converts them into cash
if higher than 12 (months), then you’re collecting payments late
Inventory turnover
rate that inventory stock is sold, or used, and replaced
Average collection period
amount of time it takes for a business to receive payment (A/R)
Fixed assets turnover
how efficiently a company generates sales from its existing fixed assets.
Days sales in inventory
average number of days it takes for a company to sell its entire inventory
Total assets turnover
efficiency with which a company uses its assets to produce sales
Current ratio
used to find liquidity
Quick, or acid test
measures a company’s ability to pay its current liabilities with its HIGHLY LIQUID assets
Working capital
helps plan for future needs and ensure the company has enough cash and cash equivalents meet short-term obligations
Days to cash (Operating cycle)
the number of days it takes for a company to convert its inventory into cash by selling it and collecting payment from customers
Debt to total assets
how leveraged the company is, higher ratios indicate more debt is used compared to equity
Times interest earned
company’s ability to cover the interest owed on its debt obligations
how many times you can payoff interest (7x)
Debt to Equity Ratio
calculates how much of a company’s funding comes from debt compared to shareholder equity
looking for 1 to 1
Equity multiplier
measures how much of a company’s assets are financed by shareholders’ equity, rather than debt
P-E Ratio
It tells you how much you are paying for each dollar of earnings
how many years until my investment pays me back (20s-30s years)
Dividend payout ratio
represents how much of a company’s earnings after tax are paid to shareholders
Book value per Share (EPS)
show how well management increases shareholder equity over time
Effective tax rate
share of your annual income you pay in taxes
Performance Measures Used in Balanced Scorecard Categories: Financial
Has our financial performance improved? / What are our goals?
Performance Measures Used in Balanced Scorecard Categories: Customer
Do customers recognize that we are delivering more value? / Who do we want to Serve?
Performance Measures Used in Balanced Scorecard Categories: Internal Business Processes
Have we improved key business processes so that we can deliver more value to customers? /
Performance Measures Used in Balanced Scorecard Categories: Learning and Growth
Are we maintaining our ability to change and improve?
Importance of the Quality Cost Report
helps manager see financial significance of defects
uses quality cost information to understand importance of large-scale quality issues
helps managers see distribution of quality costs
Connect Strategy to Daily Decision Making in the Context of a Balanced Scorecard
starts with defining a strategy, which utilizes performance measures to track strategy
continually test’s managements theories
also can be linked to measure employee performance
What does an MCE of 25% mean?
Only 25% of the total throughput time it take for a unit to be completed is spent on adding value
Acceptability of a project based on NPV
if NPV is zero or greater, it is acceptable, if below zero then not acceptable
What does NPV focus on?
NPV focuses on the difference between cash inflows and outflows and not accounting income due to the time factor
Discount Rate
typically use required rate of return
determine discount rate by starting at the company’s
weighted average cost of capital
What is IRR?
discount rate that creates a zero NPV
measures a projects rate of return over its useful life
- find discount factor using formula
- find discount rate closest to it
How do you rank investment projects using IRR?
the higher the IRR, the more attractive the investment
Simple Rate of Return
used to evaluate capital investment proposals
does not account for change of monetary value over time (discounts)
comparing the annual increase in income to the cost of the investment
Hurdle Rate of Return
minimum rate of return required for an investment or project to be considered
Decentralization
giving multiple people the authority to make financial decisions to make faster decisions and train lower management
What is the payback period formula used for?
It is used for unequal cash flows from an investment project (change from year to year) and is used instead of the other payback period formula
What is cost of capital?
average rate of return a company must pay to its creditors and shareholders for use of their funds
projects with a rate of return less than cost of capital should not be taken on
Future Value
How much money will i have one year from now if i invest 100 at a 20$ return?
Present Value
How much money do i invest today to achieve 120 one year from now at an expected 20% return?giving multiple people the authority to make financial decisions
WACC (Weighted Average Cost of Capital)
firms cost of capital where each category is proportionally weighted
What is NPV?
translates future cash flows into today’s money to determine if it is worth it
