Performance Measures Flashcards
How is inventory turnover calculated?
Find average of inventory (of finished goods beg + end /2) for the year. Calculate COGS (Sales X (1- GP%))
Inventory turnover = COGS / Avg inventory
How is return on assets calculated?
ROA = net income / avg total assets
Note assets are from balance sheet, need to take avg of beg and end.
How is return on investment calculated? Given Sales, avg invested capital, net operating profit, and cost of capital.
ROI = net operating profit / invested capital
Does not take into account cost of capital
ROI is highly related to stock price and shareholder value. ROI in the short run could cause managers to postpone critical expenditures such as repairs and maintenance.
ROI can cause managers of profitable divisions to decline projects that have an ROI above the cost of capital for the firm (even though project has positive cash flows, it can be rejected)
ROI can be affected by the allocation of indirect costs.
How do you calculate average collection period? Given 2/10, n/30 terms with 70% and 30% on days 10 and 30.
70% X 10 days + 30% X 30 days = 16%
What are the four sections of the balanced scorecard
Balanced scorecard purpose is to measure performance
Financial - profitability and ROI
Customer - customer satisfaction, success in targeted market segments, customer retention
Internal business processes - operations, measures of cost, quality and time performance incl defective units, cycle time (time it takes to produce a product)
Learning and growth - employees, infrastructure, teaming, and capabilities, employee satisfaction, hours of training per employee
How do you calculate division residual income? Given asset turnover of 1.5, sales 750k, return on sales of 8%, and imputed interest rate of 12%
If asset turnover is 1.5, then invested assets = 750k sales / 1.5 = 500k
Residual income = profit - imputed interest on investment
Profit is 750k X 8%
Imputed interest is 500k X 12%
Residual income = 0
Note return on assets NOT to be confused with asset turnover
How do you calculate economic value added
EVA = NOPAT - capital charge on invested capital
Net operating income after taxes - capital charge on invested capital (WACC % X invested capital)
Does not use depreciation expense or change in working capital
Asset turnover ratio
Asset turnover = sales / average invested capital
What are the different types of costs of quality
Appraisal cost - quality control costs - include testing and inspecting - costs incurred in detecting products that do not meet requirements
Prevention cost - any quality activity designed to do the job right the first time - cost of product designers to improve components
Internal failure - cost incurred when substandard products are produced but discovered before shipping to customer - example is reworking defective parts
External failure - incurred for products that do not meet requirements of the customers and have been shipped to the customer - cost of parts returned by customers, liability claims
What are profitability ratios?
ROA, GM, operating profit margin
Note price/earning ratio is a market ratio = price of share of stock / earning per share
NOT a profitability ratio, it focuses on performance instead.
How can the AR turnover ratio be improved?
By factoring the receivables involves selling them and turnover would be increased.
Note that pledging involves borrowing funds on the AR, not improving turnover.
Note by improving the credit terms offered, this would decrease turnover.
Define strategic objective
A statement of what the strategy must achieve and what is critical to its success
Strategy initiative
A key action program required to achieve strategic objectives
Strategy map
A diagram of the cause and effect relationships between strategic objectives
Target
Level of performance or rate of improvement needed in the performance measure.
What are the steps in the strategic planning process
1 - Create a mission statement first. 2 - develop performance measures 3 - translate objectives into goals 4 - determine actions to achieve goals **Check on ful list and sequence
How is times interest earned calculated
Times interest earned = EBIT / interest expense
Sales - COGS - admin exp - deprec = EBIT
How is free cash flow calculated
Free cash flow = NOPAT + deprec - change in working capital - capital expenditures
What is operating profit margin vs gross profit
Operating profit margin = operating profit / sales
Operating profit = sales - COGS - G&A expenses
Gross profit = sales - COGS
What is the dupont equation
Finds ROI
ROI = return on sales X asset turnover
ROI = net operating profit / sale X sales / total assets
Note that ROI needs the book value of common equity which cannot be found from price to earnings ratio, EPS, and net profit margin.
What is six sigma quality
It is a statistical measure expressing how close a product comes to its quality goal. Six sigma is 99.999997% perfect with a 3.4 defects per million parts. (6th decimal place)
What do the tools do - control chart, pareto diagram
Control chart - statistical plot that helps to detect deviations before they generate defects
Pareto diagram - ranks the causes of process variations (defects) by the degree of impact on quality (indicates how frequent each type of defect occurs)
What is the focus of managerial accounting
It focuses on providing info for decision making by employees and mgmt (internal parties).
NOT to be confused with principles of financial accounting.
