Chapter 3: Non-Financial and Non-GAAP Measurement

Question 1

Balanced Scorecards

What is a balanced scorecard?

Answer 1

It is used internally to provide financial and non-financial measurement that is used to provide a competitive advantage

Question 2

Balanced Scorecards

What are the components of a balanced scorecard?

Answer 2

There are four categories of a balanced scorecard:
* Financial
* Learning and Growth
* Customer Satisfaction
* Internal business process

Question 3

Balanced Scorecards

What are examples of the learning and growth component of a balanced scorecard?

Answer 3

• Employee Satisfaction
• Retention

Question 4

Balanced Scorecards

What are the criterion for KPIs?

Answer 4

• Clarity
• Relevance
• Measurability

Question 5

Benchmarking

What is benchmarking?

Answer 5

Benchmarking uses current data and measures the quantitative and qualitative data against an outstanding performer

Question 6

Benchmarking

What is process benchmarking?

Answer 6

• Process benchmarking studies organization’s operations in order to find new ideas that would provide an advantage over the competitor
• Process benchmarking provides more choices of measurement, so there are more choices of industries in order to compare to

Question 7

Value-Based Management

What is the purpose of residual income?

Answer 7

Residual income will help a company determine if they will receive additional benefit if capital is added

Question 8

Value-Based Management

What is the calculation to determine residual income?

Answer 8

Operating Income - Target Amount of Interest on Invested Capital

Targeted amount of Interest on Invested Capital = Total Assets x Cost of Capital %

Question 9

Value-Based Management

What is the calculation to determine Economic Value Added (EVA)?

Answer 9

After-Tax Operating Income
(Investment Base)

Investment Base = (Carrying Equity x Equity WACC) + (Carrying Debt x Debt WACC x (1-tax rate))

Question 10

Value-Based Management

What are the steps to calculate the ROI and residual when new investments are added?

Answer 10

Step 1: Calculate new ROI
(Net Profit + Additional Profit) / (Current Asset + Additional Asset)

Step 2: Calculate increase in residual income
Additional Profit x (New Asset x Return %)

Question 11

Value-Based Management

What are the effects on ROI and residual income when additional long-term assets are purchased?

Answer 11

Since additional capital is added, it will cause a decrease in both ROI and residual income

Question 12

Value-Based Management

What is the calculation to determine maximum costs based on residual income?

Answer 12

Maximum Costs = Revenue - Targeted Revenue - Residual income

Question 13

Nonfinancial Measures

What is the calculation to determine manufacturing cycle efficiency?

Answer 13

Days in processing / Total manufacturing time

Days from Order Placed and Order Completed are not included in this equation

Question 14

Nonfinancial Measures

What is the calculation to determine the delivery time cycle?

Answer 14

The delivery time cycle is a total number of days from when the order is placed to when the order is shipped

Question 15

Nonfinancial Measures

What are the non-financial measurements?

Answer 15

• Quality level of each outgoing product
• Returned merchandise
• Customer complaints and reviews
• Competitive ranking
• On-time delivery

Question 16

Non-GAAP Measures

What are the types of non-GAAP measurements?

Answer 16

• Free Cash Flow: Operating cash flow - capital expenditures
• EBIT
• EBITDA (Earnings before interest, taxes, depreciation and amortization)
• Core Earnings: Profits from operating activities - amounts from non-operating activities and non-recurring items

Question 17

Non-GAAP Measures

What are the SEC rules for disclosing non-GAAP financial measures?

Answer 17

• Non-GAAP must be presented along with the most direct GAAP financial measure
• Using Non-GAAP financial measures to material mislead is strictly prohibited
• A reconciliation of Non-GAAP to GAAP is required