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CPA Business > Performance Measures > Flashcards

Performance Measures Flashcards

1
Q

What four perspectives are included in Balanced Scorecard?

A

Financial / Customer / Internal Business Processes / Learning and Growth

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2
Q

Why was Balanced Scorecard created?

A

To measure Performance.

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3
Q

What are Strategy Maps?

A

Diagrams of Strategic Cause and Effect Relationships.

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4
Q

What is a Strategic Initiative?

A

A plan to achieve goals.

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5
Q

What measures are used under Value-Based Management?

A 
Return on Investment
Residual Income
Spread
Economic Value Added
Free Cash Flow
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6
Q

How is Return on Investment (ROI) calculated?

A

ROI : Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 : 60% ROI

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7
Q

How is Residual Income calculated?

A

Operating Income - (Required Rate of Return x Invested Capital) : Residual Income

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8
Q

What is another name for Required Rate of Return (RROR)?

A

RROR is also called ‘Cost of Capital’

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9
Q

What is Weighted Average Cost of Capital (WACC)? How is it calculated?

A

Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) : 10.65%

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10
Q

How is Spread calculated?

A

Spread : ROI - Cost of Capital

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11
Q

What is the primary point of Economic Value Added? How is it calculated?

A

Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added : Operating Income After Tax - (Net Assets x WACC)

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12
Q

How is Free Cash Flow calculated?

A 
Operating Income After Tax
\+ Depreciation & Amortization
- Capital Expenditures
- Change in Net Working Capital
\: Free Cash Flow
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13
Q

What is measured by Six Sigma?

A

It measures a product versus its quality goal.

Goal is to reduce the number of defects in a mass production process

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14
Q

What is the Asset Turnover Ratio?

A

Sales / Average Assets

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15
Q

What does the Current Ratio tell us? How is it calculated?

A

Can the company pay their short-term liabilities?

Current Ratio : Current Assets / Current Liabilities

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16
Q

What does the Debt to Equity Ratio tell us? How is it calculated?

A

How is the company financing its capital?

Debt to Equity Ratio : Total Debt / Total Equity

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17
Q

What does the Debt to Total Assets ratio tell us? How is it calculated?

A

What proportions of the company’s assets are encumbered with debt?

Debt to Total Assets : Total Liabilities / Total Assets

18
Q

What does Gross Margin % tell us? How is it calculated?

A

How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales

19
Q

What does Operating Profit Margin tell us? How is it calculated?

A

How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin : Operating Profit / Net Sales

20
Q

How is Times Interest Earned calculated and what does it mean?

A

Can the company make their interest payments?

Times Interest Earned : Earnings Before Tax & Interest / Interest Expense

21
Q

What does Return on Assets tell us? How is it calculated?

A

What % return are the assets generating?

Return on Assets : Net Income (net of interest & taxes) / Average Total Assets

22
Q

How is Market/Book ratio calculated?

A

Market Value of Common Stock / Book Value of Common Stock

23
Q

What is Inventory Turnover and how is it calculated?

A

How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory

24
Q

What is the Quick Ratio and how is it calculated?

A

It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio : (Current Assets - Inventory) / Current Liabilities

25
Q

What is Average Collection Period- and how is it calculated?

A

How many days does it take the company to collect payment on A/R?

Average Collection Period : Average AR / Average Sales Per Day

26
Q

What is an Internal Failure?

A

A measure of internal performance

Products have quality defects- but are caught BEFORE they leave the warehouse.

Scrap, rework, tooling changes, and downtime

27
Q

What is an External Failure?

A

Measure of customer satisfaction

Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.

Warranty costs, product liability costs and loss of customer goodwill, environmental costs (fees)

28
Q

What is Appraisal Cost?

A

Quality control- testing & inspection costs.

29
Q

What are the types of diagrams used to measure process performance?

A

1) statistical control charts
2) pareto diagrams
3) histograms
4) fishbone
5) benchmarking

30
Q

What do statistical control charts do?

A
  • monitor status of any process subject to acceptable and unacceptable variations
  • adv: makes trends and cycles visible
  • disadv: doesnt indicate cause
31
Q

What is a pareto diagram?

A

It is a bar chart that assists with quality control analysis, allowing managers to see at a glance which areas are of most concern

32
Q

What are histograms?

A

Similar to pareto diagrams but this displays a continuum for the independent variable

33
Q

What is a fishbone diagram?

A

Aka cause and effect

-TQM process improvement technique useful in studying causation

34
Q

What are the kinds of benchmarking?

A

1) competitive benchmarking: in same industry
2) process (function) benchmarking: studies orgs w/ similar process regardless of industry
3) strategic benchmarking: search for successful competitive strategies
4) internal benchmarking: applying best practices from one part of the org to another

35
Q

What are the Six Sigma Roles?

A

1) Executive level: must be fully committed to program and it responsible for making all required resources available
2) Champion: resp for the implementation
3) Master Black Belts: assist the champions with the implementation across the org
4) Black Belts: 100 % if time is on six sigma projects
5) Green n Yellow: do six sigma + reg job

36
Q

What are conformance costs?

A

These are costs of prevention and appraisal, which are financial measures of internal performance

1) preventions costs
2) appraisal costs

37
Q

What are prevention costs?

A

Costs that attempt to avoid defective output. These include

  • preventive maintenance
  • employee training
  • review of equipment design
  • evaluation of suppliers
38
Q

If Current or Quick Ration = 1, effect of transaction?

A

If =1 = numerator is the same as denominator
so any changes will have same effect for both, resulting in no change in ratio.
4 - 1 / 4 - 1 = 3 / 3

39
Q

If Current or Quick Ration > 1, effect of transaction?

A

If >1 = numerator is greater than denominator
so any changes will have a less effect on numerator, resulting in a change in ratio in opposite direction.

4 - 1 / 3 - 1 = 3 / 2

If paying off CL with CA, the effect is to decrease the ratio

40
Q

If Current or Quick Ration > 1, effect of transaction?

A

If >1 = numerator is greater than denominator
so any changes will have a less effect on numerator, resulting in a change in ratio in opposite direction.

4 - 1 / 3 - 1 = 3 / 2

If paying off CL with CA, the effect is to increase the ratio

CPA Business (10 decks)

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