Performance Measures

Question 1

How is inventory turnover calculated?

Answer 1

Find average of inventory (of finished goods beg + end /2) for the year. Calculate COGS (Sales X (1- GP%))
Inventory turnover = COGS / Avg inventory

Question 2

How is return on assets calculated?

Answer 2

ROA = net income / avg total assets

Note assets are from balance sheet, need to take avg of beg and end.

Question 3

How is return on investment calculated? Given Sales, avg invested capital, net operating profit, and cost of capital.

Answer 3

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.

Question 4

How do you calculate average collection period? Given 2/10, n/30 terms with 70% and 30% on days 10 and 30.

Answer 4

70% X 10 days + 30% X 30 days = 16%

Question 5

What are the four sections of the balanced scorecard

Answer 5

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

Question 6

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%

Answer 6

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

Question 7

How do you calculate economic value added

Answer 7

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

Question 8

Asset turnover ratio

Answer 8

Asset turnover = sales / average invested capital

Question 9

What are the different types of costs of quality

Answer 9

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

Question 10

What are profitability ratios?

Answer 10

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.

Question 11

How can the AR turnover ratio be improved?

Answer 11

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.

Question 12

Define strategic objective

Answer 12

A statement of what the strategy must achieve and what is critical to its success

Question 13

Strategy initiative

Answer 13

A key action program required to achieve strategic objectives

Question 14

Strategy map

Answer 14

A diagram of the cause and effect relationships between strategic objectives

Question 15

Target

Answer 15

Level of performance or rate of improvement needed in the performance measure.

Question 16

What are the steps in the strategic planning process

Answer 16

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

Question 17

How is times interest earned calculated

Answer 17

Times interest earned = EBIT / interest expense

Sales - COGS - admin exp - deprec = EBIT

Question 18

How is free cash flow calculated

Answer 18

Free cash flow = NOPAT + deprec - change in working capital - capital expenditures

Question 19

What is operating profit margin vs gross profit

Answer 19

Operating profit margin = operating profit / sales
Operating profit = sales - COGS - G&A expenses

Gross profit = sales - COGS

Question 20

What is the dupont equation

Answer 20

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.

Question 21

What is six sigma quality

Answer 21

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)

Question 22

What do the tools do - control chart, pareto diagram

Answer 22

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)

Question 23

What is the focus of managerial accounting

Answer 23

It focuses on providing info for decision making by employees and mgmt (internal parties).
NOT to be confused with principles of financial accounting.