Management Accounting Flashcards
Average collection
Average collection: Average accounts receivable/(credit sales/365)
Assesses the efficiency of receivable collections and effectiveness of collection policy’s.
Can also be used to assess the risk that overdue receivables will become uncollectable
Gross margin percentage
Gross margin percentage: (sales – cost of good sold)/sales
Measures the percentage of each sales dollar that remains after recovering the cost of good sold
Profit margin
Profit margin: net income/sales
Measures overall profitability and the bottom line. Used often while discussing a company’s profitability.
Return on assets (ROA)
Return on assets (ROA): net income/average total assets
Measures how effectively acids are used to generate profits
Return on equity (ROE)
Return on equity (ROE): net income/average equity
Measures the profits earned for each dollar invested in equity
Debt ratio
Debt ratio: total liabilities/total assets
Compares accompanies total debt to its total assets and used to assess the amount of leverage being used to finance assets.
A higher ratio means the organization is more leverage and more financially risky.
Debt – equity
Debt – equity: total liabilities/equity
Compares total liabilities to total equity and measures how much suppliers, lenders and other creditors have committed to the organization versus what owners have committed.
Debt service coverage
Debt service coverage: net operating income/(principal + interest payments)
Looks and net operating income as a multiple of the dead payments due within a year. This is a measure of how much cash is available to pay debt.
Times interest earned ratio
Times interest earned ratio: EBIT/interest expense
Used to measure the ability to pay interest expenses from income. The lower the ratio, the more income is burdened by debt expense.
Asset Turn over
Asset turnover: sales/average total assets
Indicates how efficiently assets are utilized.
Asset turnover in days
Asset turnover in days: 365/(sales/average total assets)
Measures the average number of days that it takes for the company to earn sales equal to the amount of assets that in as
Accounts payable turnover
Accounts payable turn over: purchases/average accounts payable
Measures how quickly accounts payable are paid. The higher the turnover rate the more quickly payments are made. Do not want turnover to be too high as that indicates poor cash management.
Days payable outstanding
Days payable outstanding: ending accounts payable/(cost of goods sold/365)
Used as an estimate of the number of days it takes a company to pay it supplier. A higher number of days could indicate difficulty in making payments.
Describe a static budget
Static budgets are fixed based on a planned level of sales and/or production, and they are not adjusted if actual units or activity levels differ from plan.
Describe a flexible budget
Flexible budgets are adjusted automatically to reflect planned costs for the actual level of activity. The advantage of the flexible budget is that it separates cost control from activity control.
