More 2 Know 3.0 Flashcards
Fill in the blank.
If the net present value of a proposed investment is negative then _____.
The discount rate used is greater than the project’s internal rate of return
WHY? - Because the higher the discount rate, the lower the NPV
IRR is the discount rate at which the NPV is zero. Consequently, if the NPV is negative, the discount rate must exceed the IRR.
WHAT is Total Quality Management (TQM) in a manufacturing environment?
Designing the product to minimize defects
i.e. “Doing it right the first time”
WHAT are the basic principles of Total Quality Management (TQM)?
THEY include:
(1) Doing each job right the first time
(2) Being customer-oriented
(3) Committing the organizational culture to continuous improvement; and
(4) Promoting teamwork and employee empowerment
WHAT is the danger of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of an investment center?
ROI may lead to rejecting projects that yield positive cash flows
WHAT should be top management’s focus when evaluating an investment center?
THE Return on Investment (ROI)
In essence, net income is stated as a proportion of investment capital (resources required)
WHAT type of responsibility centers include controllable revenues?
INVESTMENT and Profit Centers
WHY? - Because they have significant control over the amount of capital invested, their costs, revenues, and investments
WHAT is the term for comparing and contrasting an entity’s financial information to published information reflecting optimal amounts?
BENCHMARKING
i.e. IT is an ongoing process that requires quantitative and qualitative measurement of the difference between the performance of an activity and the performance by the benchmark
WHAT is the equation for return on common equity?
Income Available to Common Shareholders divided by Average Common Equity
Items included are:
(1) Net income available to common shareholders
(2) Average common equity
* **Divide #1 by #2
WHAT would be a reason to use Residual Income instead of ROI?
Goal congruence is more likely to be promoted by using residual income
i.e. A firm benefits from expansion if residual income is earned - Expansion might be rejected with ROI if it is lowered
WHAT Performance Measure integrates financial performance, internal operations, learning and growth, and customer satisfaction?
THIS is the Balanced ScoreCard
HOW can a firm increase its return on investment?
By increasing sales revenue and operating expenses by the same percentage
i.e. If a firm is profitable, increasing sales and expenses by the same percentage increases ROI
WHAT is considered a least complex segment or area of responsibility for allocated costs?
A Cost Center
WHY? - Because it has no responsibility for revenues or investments
WHAT is considered the “Imputed Interest Rate” of a firm?
THE target return on investment set by the company’s management
WHAT is the equation for return on equity?
IT is net income divided by average stockholders’ equity
WHAT is NOT required WHEN ISO 9000 standards are adopted?
Consistent high quality products
WHY? - Because the objective of ISO 9000 standards is to ensure consistent quality, even if the quality is poor
