Managerial Acct final Flashcards
Opportunity costs
potential benefit lost by taking specific action when two or more alternative choices are available
sunk costs
This arises from a past decision and cannot be avoided or changed. Not relevant to future decisions
out-of-pocket costs
requires future outlay of cash and results from results of managements decisions; is relevant in making future decisions
avoidable costs
costs or expenses that would not be incurred if the segment is eliminated; also known as relevant costs
unavoidable costs
costs or expenses that would continue even if segment is eliminated
IRR
rate used to calculate acceptability of an investment. It equals the rate that yields an NPV of 0 for an investment
hurdle rate
required rate of return or the cost of capital that the company must pay to long term creditors and shareholders
NPV
- Applies the time value of money to cash inflows/outflows so management can evaluate a projects benefits and costs at one point in time
- decision: If NPV> (or equal to)$0 then asset is expected to recover its cost and provide a return at least as high as that required- INVEST
What methods of capital budgeting take into account the time value of money?
- NPV and IRR- do take it into account
2. Payback rate, accounting rate of return- DO NOT
horizontal financial analysis
Comparison of companys financial conditions and performance across time
vertical fin analysis
comparison of companys financial condition and performance to a base amount
common size statements
reveal changes in the relative importance of each financial statement item by redefining each in terms of common size percents
(analysis amt/base amt)x100
base amount is total assets
base amount is revenue
ratio analysis
measurement of key relations between fin statment items
Generally fixed costs are ____
irrelevant
Variable costs are ____
relevant
Time has a ____ value, money has a ____ value
money, time
Why is capital budgeting is risky?
- outcome is uncertain
- large amount $ involved
- Decision is diff to reverse
- Investment involves a long term commitment
How well are we meeting short-term obligations to get $
liquidity/efficiency ratios
Ability to generate $ and meet long term obligations
solvency ratio
ability to provide financial rewards to attract and retain financing
profitability ratio
ability to generate market expectations
market prospects
We want high/low accts. recievable when we have a lot of cash
low accts recievable- means we converted (a/r) to cash
a lot of accounts payable are a
Source of cash
a little accounts payable are a
use of cash
If COGS>Sales
we have a problem
If this ratio is high it suggests a strong liquidity position and an ability to meet current obligations
current ratio
This reflects short term liquidity; Also measures the ability to use its quick assets to pay its current liabilities.
acid test ratio
This measures how frequently a company converts receivables to cash
a/r turnover- high # is favorable
Measure of how quickly a company collects a/r
days sales uncollected
This is useful for evaluating inventory liquidity
days sales in inventory
Reflects a company’s ability to use its assets to generate sales and is an important measure of operating efficiency
total asset turnover
A company’s is considered less risky if there are more/less equity
more
larger ratio implies less opportunity to expand through use of additional debt financing
Debt must be repaid with interest (equity doesn’t) so want more equity than debt; also if economy is bad debt becomes more burdensome
debt to equity ratio
The larger the ratio, the less risky the company is for creditors
times interest earned
This reflects the companys ability to earn NI from sales
profit margin
shows the percentage of profit a company earns in relation to its overall resources.
ROA
The higher the ROA, the better management/ better operating efficiency
Measures the companys success in earning income for owners
ROE
Used as an indicator of market expectations for future growth and risk of a comp’s earnings
price-earning ratio
used to compare the dividends paying performance of diff. company
Dividend yield
If avoidable costs>revenue then we should
Eliminate segment
Diff bw Payback period and breakeven time
pbp ignores the time value of money and breakeven doesnt
comparison of a company’s Financial condition and performance to a base amount.
vertical analysis
comparison of a company’s Financial condition and performance across time.
horizontal analysis
the company’s current performance is compared to its prior performance and its relations between Financial items. Apple’s current net income, for instance, can be compared with its prior Year’s net income and in relation to its revenues or total assets.
intercompany
provide standards of comparisons.
competitors
published industry statistics provide standards of comparison (Available from servers like Dun & Bradstreet, Standard & Poor’s, and Moody’s).
industry
standards of comparisons developed from experience.
guidelines
The time value of money concept states
that a dollar received today is more valuable than a dollar received at some point in the future. The reason is that someone who agrees to receive payment at a later date foregoes the ability to invest that cash right now
Internal vs external users use financial information for
i: provide strategic information / strategic and operating decisions to improve the company’s efficiency and effectiveness.
e: pursuing their own goals
the minimum acceptable rate of return for an investment decisions is called
hurdle rate of return
a disadvantage of using the payback period to compare investment alternatives is that it
ignores cash flows beyond the payback period
