More 2 KnoW 4.0 Flashcards
WHAT term is used for residual income that remains after the cost of all capital, including equity capital, has been deducted?
THIS is Economic Value-Added
i.e. IT equals after-tax operating income minus the cost-of-capital-weighted investment base
WHAT is the equation for economic rate of return on common stock?
(Dividends + change in price) divided by beginning price
WHAT authority does a “Profit Center” have?
THE authority to make decisions affecting the major determinants of profit including the power to choose its market and sources of supply
i.e. A profit center is responsible for both revenues and expenses
WHAT organizational segment is most like an independent business?
AN Investment Center
WHY? - Because it is responsible for its own revenues, costs incurred, and capital invested
WHAT are Common Costs?
Indirect costs
WHY? - Because they cannot be traced to a particular cost object in an economically feasible manner
WHAT is a responsibility center’s importance?
THEY hold managers responsible for factors they can influence
i.e. an assembly line manager would be responsible for factors such as supervisory salaries because they influence this to some degree
An assembly line manager would NOT be responsible for Equipment Depreciation
WHAT LIMITATION for calculations do the payback period, discounted payback, internal rate of return (IRR), and net present value (NPV) all have in common?
THEY all rely on the forecast of future data
WHAT attribute of a management report has a great impact on managers’ decision making?
RELEVANCE
i. e. THIS is the most important attribute of management reporting
- IT is determined by asking the question: “Does a change to this revenue or cost element depend on my choice?”
WHAT is an alternative means in which you could calculate Return on Sales?
($ sales × % return on sales)
i.e. THIS will give you your sales amount
WHAT is an alternative means of calculating Sales?
Sales = Capital turnover ratio x Average Invested Capital
WHAT criterion for allocating common costs promotes the acceptance of cost allocation?
THE Direct cause-and-effect Relationship
WHY? - Because of the perceived fairness of the procedure
Under what conditions would managers’ be most accepting of the allocations of common costs?
Under the conditions of CAUSE and EFFECT
WHY? -Because managers’ desire to see a direct cause-and-effect relationship between a common cost and the actions of the cost object
NOTE: The difficulty with common costs is that they are indirect costs whose allocation may be arbitrary
WHAT is a means of calculating the TARGET INVESTMENT amount?
TOTAL ASSETS × COST OF CAPITAL
HOW would a series of transactions be handled if they were processed using a batch processing method?
1 - Assigned to groups before posting, and
2 - Each transaction had its own line entry in the appropriate ledger
WHAT is the equation for the capital turnover ratio?
SALES divided by average invested capital
Thus, you can use the reversal of this equation to find out what the investment capital is
i.e. You can find the investment amount by dividing sales ÷ by the capital turnover ratio
