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Performance Measures Flashcards

1
Q

What four perspectives are included in Balanced Scorecard?

A

The following are 4 perspectives within the Balanced Scorecard:

  1. Financial - ROI- Revenue Growth- Profitability
  2. Customer - Increase Customers- Increase Satisfaction
  3. Internal Business Processes - Efficient and Effective Operations- Improve Quality- Reduce Defects
  4. Learning & Growth - Training- Personnel Development
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3
Q

Why was Balanced Scorecard created?

A

To measure Performance.

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4
Q

What are Strategy Maps?

A

Diagrams of Strategic Cause and Effect Relationships.

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5
Q

What measures are used under Value-Based Management?

A

The following measures are used under Value-Based Management:

  1. Return on Investment
  2. Residual Income
  3. Spread
  4. Economic Value Added
  5. Free Cash Flow
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6
Q

What is a Strategic Initiative?

A

A plan to achieve goals.

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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

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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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

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

A

RROR is also called ‘Cost of Capital’

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11
Q

How is Spread calculated?

A

Spread = ROI - Cost of Capital

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12
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.

Operating Income After Tax
- (Net Assets x WACC)

= Economic Value Added

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13
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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14
Q

What is measured by Six Sigma?

A

It measures a product versus its quality goal.

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15
Q

What is the Asset Turnover Ratio?

A

Sales / Average Assets

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16
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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17
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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18
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

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19
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

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20
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

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21
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 Interest & Tax/ Interest Expense

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22
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

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23
Q

How is Market/Book ratio calculated?

A

Market Value of Common Stock / Book Value of Common Stock

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24
Q

What is Inventory Turnover and how is it calculated?

A

How quickly does inventory get sold?

Inventory Turnover = COGS / Average Inventory

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25
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

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26
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

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27
Q

What is an Internal Failure?

A

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

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28
Q

What is an External Failure?

A

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

This includes recalls.

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29
Q

What is Appraisal Cost?

A

Quality control- testing & inspection costs.

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30
Q

What are the components of the Balanced Scorecard?

A

The components of the Balanced scorecard are:

  1. Strategic objectives
  2. Performance measures
  3. Baseline performance
  4. Targets
  5. Strategic initiatives
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31
Q

What are Strategic objectives?

One of the components of the Balanced Scorecard

A

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

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32
Q

What are Performance measures?

One of the components of the Balanced Scorecard

A

Performance measures describe how success in achieving the strategy will be measured and tracked

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33
Q

What is Baseline performance?

One of the components of the Balanced Scorecard

A

Baseline performance is the current level of performance for the performance measure

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34
Q

What are Targets?

One of the components of the Balanced Scorecard

A

A Target is the level of performance or rate of improvement needed in the performance measure

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35
Q

What are the performance measures within the Financial perspective of the Balanced Scorecard?

A

The performance measures in the Financial perspective of the balanced scorecard are as follows:

  1. Return on investment (ROI)
  2. Economic profit
  3. Economic value added
  4. Cash flow ROI
  5. Free cash flow
  6. Net income / sales ratio
  7. Sales / asset ratio
  8. Revenue growth
  9. Revenue from new products (existing customers)
  10. Revenue from new products (new customers)
  11. Cost of sales %

In general, look for income statement and balance items -a financial statement line item

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36
Q

What are Strategic initiatives?

One of the components of the Balanced Scorecard

A

Strategic initiatives are key action programs required to achieve strategic objectives

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37
Q

What is a Value chain?

A

The Value chain in the balanced scorecard framework is the sequence of business processes in which usefulness is added to the products or services of a company and includes:

  1. Innovation process
  2. Operations process
  3. Post-sales process

The value chain is one way to describe the internal process perspective in the balanced scorecard and its performance measures

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38
Q

What are the performance measures within the Customer perspective of the Balanced Scorecard?

A

The performance measures in the Customer perspective of the balanced scorecard are as follows:

  1. Customer satisfaction
  2. Customer retention
  3. Customer acquisition
  4. Percentage of highly satisfied customers
  5. Depth of relationship
  6. Percentage of business from customer referrals
  7. Customer satisfaction with new product/service offering

In general, look for terms relating to “customers”

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39
Q

What are the performance measures within the Learning and growth perspective of the Balanced Scorecard?

A

The performance measures in the Learning and growth perspective of the balanced scorecard are as follows:

  1. Employee satisfaction and engagement
  2. Employee turnover
  3. Employee objectives linked to the balanced scorecard
  4. Employee awareness of the strategy
  5. Percentage of employees trained in total quality management
  6. Number of six-sigma black belts
  7. Performance improvement from employees’ suggestions
  8. Percentage of ideas and best practices shared across organization
  9. Percentage of R&D employees to total employees
  10. R&D expenditure as a % to sales revenue

In general, look for the word “employees” or “research & development” for this category

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40
Q

What are the performance measures within the Internal process perspective of the Balanced Scorecard?

A

If you see something (an answer choice) that seems to relate to how the business is ran or something to do with the business, it is in the internal process perspective category

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41
Q

What are the Profitability ratios?

A

The profitability ratios are:

  1. Gross Margin
  2. Operating profit margin
  3. Return on assets / ROI
  4. Return on equity
  5. Dividend payout ratio

Profitability ratios measure how effective a firm is at generating profit from operations

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42
Q

What are the Asset utilization (Activity) ratios?

A

The asset utilization ratios are:

  1. Receivable turnover
  2. Average collection period
  3. Inventory turnover
  4. Total asset turnover

Asset utilization ratios measure the time it takes to convert various assets to sales or cash. These ratios are used to measure the efficiency with which assets are managed

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43
Q

What are the Liquidity ratios?

A

The Liquidity ratios are:

  1. Current ratio
  2. Quick or Acid ratio

Liquidity ratios measure the firm’s ability to meet its short-term obligations as they come due

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44
Q

What are the Debt utilization ratios?

A

The Debt utilization ratios are:

  1. Debt to total assets
  2. Debt to equity
  3. Times interest earned

Debt utilization ratios measure the effectiveness with which management finances the assets of the firm. They are used to evaluate the financial leverage of the firm

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45
Q

What is Economic Value Added (EVA) formula?

A

Economic Value Added (EVA)

EVA = NOPAT - (i x [Total Assets - Current Liabilities])

NOPAT = Net operating profit after taxes

i = WACC

EVA measures stress the importance of making investments only when the return exceeds cost and, in the process, value to the stockholder is maximized

Note: EVA measures is useful for incentive based compensation (employee bonus & stock options), resource allocation (budgeting) and investor relations

However, using EVA alone can have certain disadvantages by failing to reflect all the pathways to value creation, such as the following balanced scorecard perspectives: customer, learning & growth, and internal business process

46
Q

What are the Market ratios?

A

The Market ratios are:

  1. Price / earnings ratio
  2. Market / book ratio

Market ratios involve measures that consider the market value of the firm’s common stock

47
Q

What is Free Cash Flow (FCF) formula?

A

Free Cash Flow formula is:

NOPAT
\+ Deprn Exp / Amort Exp
- Capital Expenditures
- Δ in working capital requirements
= Free Cash Flow

NOPAT = Net Operating Profit after Taxes

48
Q

What is the Gross Margin (Gross Profit) formula?

Profitability Ratio

A

Gross Margin (Gross Profit) formula is:

Net Sales
- COGS
= Gross Margin or Gross Profit

Gross Sales
- Sales discounts
- Sales returns + allowances
= Net Sales

  • COGS or COS
    = GM or GP

Gross margin measures the % of each sales dollar remaining after payment for the goods sold

49
Q

What is the Operating Profit Margin formula?

Profitability Ratio

A

Operating Profit (EBIT) Margin formula is:

Operating Profit / Operating Income / EBIT
/ Net Sales
= Operating Profit Margin

Gross Margin or Gross Profit

  • Operating Expenses: R&D, Selling, G&A, Organization costs, Impairment loss (SEC companies)

= Operating Income / Operating Profit / EBIT

Operating profit margin measures the % of each sales dollar that remains after the payment of all cost & expenses except for interest and taxes

50
Q

What is the Profit Margin formula?

Profitability Ratio

A

Profit Margin formula is:

Net Income (Net Income after Profit & Tax)
/ Net Sales

= Profit Margin

Profit margin ratio is used to find the proportion of revenue that finds its way into profits

51
Q

What is the Return on Assets (ROI) formula?

Profitability Ratio

A

The Return on Assets (ROI) formula is:

Net Income
/ Average Total Assets
= ROA or ROI

and

Net Income * Net Sales
/ Net Sales / Average Total Assets

Gross Sales
- Sales discounts
- Sales returns + allowances

= Net Sales

ROI measures the % return generated on the assets available (investment)

52
Q

What is Cash Flow ROI?

A

Cash Flow ROI represents the average real cash return of all existing projects as reflected in the financial statements. This approximates the IRR for all projects

53
Q

What is the Return on Equity formula?

Profitability Ratio

A

The Return on Equity formula is:

NI after Interest & Taxes (Net Income)
/ Average Common Stockholders Equity
= ROE

Note: We only want stockholders equity that is associated with the common stockholders. So, we do the following:

Total SHE
- P/S par value
- P/S dividends (including amounts in arrears)
- P/S liquidating dividend premium
= SHE for Common stockholders **

** You will have to compute this formula for the current year and the previous year; then add them total together and divide by 2 to calculate the average. It is the average number that will go in the denominator

ROE measures the % return generated to common stockholders

54
Q

What is the A/R Turnover ratio?

Asset Utilization [Activity] Ratio

A

Account Receivable Turnover is calculated as follows:

Net Credit Sales
/ Average Account Receivables, net *
= AR Turnover

    • We use the A/R, net amount as in:

A/R, gross
- Allowance
= A/R, net

AR turnover measures the number of time per year the balance of receivables is collected. Important measure of the efficiency with which management is managing A/R

55
Q

What is the Dividend payout ratio formula?

Profitability Ratio

A

The Dividend payout ratio formula is:

Cash dividend per Common Share
/ Earnings per Common Share (EPS)
= Dividend payout Ratio

The dividend payout ratio measures the dividend paid in relation to net earnings

56
Q

What is the Average Collection Period formula?

Asset Utilization [Activity] Ratio

A

Average Collection Period is calculated as follows:

365
/ AR Turnover
= Average Collection Period

The average collection period measures the average number of days it takes to collect an account receivable

57
Q

What is the Inventory turnover formula?

Asset Utilization [Activity] Ratio

A

Inventory turnover is calculated as follows:

COGS
/ Average Inventory
= Inventory turnover

Gross purchases
- Purchase discounts
- Purchase returns & allowances
= Net purchases
\+ Freight-In / Transportation-In **
= COG Purchased
Beginning Inventory
\+ COG Purchased
= COGAS
- Ending Inventory
COGS

** - this is the cost of getting your goods from the vendor/supplier to you

Inventory turnover measures the efficiency with which a firm utilizes (manages) its inventory

58
Q

What is the # of Days’ sales in Inventory formula?

Asset Utilization [Activity] Ratio

A

The Number of Days’ sales in Inventory formula is as follows:

365 days
/ Inventory turnover
= # of Days’ sales in Inventory

This is another measure to evaluate the efficiency with which a firm utilizes (manages) its inventory

59
Q

What is Total Asset Turnover formula?

Asset Utilization [Activity] Ratio

A

Total Asset Turnover is calculated as follows:

Net Sales
/ Average Total Assets
= Total Asset Turnover

Total asset turnover measures the efficiency with which the firm uses its total assets

60
Q

How do you calculate a firm’s Current Ratio?

Liquidity ratio

A

Current ratio is calculated as follows:

Current Assets **
/ Current Liabilities ***
= Current Ratio

** - current assets consist of the following: cash, short-term investment (including current maturities on LT investments), receivables, inventory & prepaid assets

*** - current liabilities consist of the following: A/P, accrued salaries, accrued expenses, sales tax payable (if due within 1 year), and deferred/unearned revenue

The current ratio is the most common measure of short-term liquidity

61
Q

How do you calculate a firm’s Quick (Acid) Ratio?

Liquidity ratio

A

Quick (Acid) Ratio is calculated as follows:

Cash + A/R (net) + Marketable securities
/ Current liabilities
= Quick (Acid) Ratio

The quick (acid) ratio provides a more conservative measure of short-term liquidity

62
Q

How do you calculate a firm’s Debt-to-total assets Ratio?

Debt Utilization Ratio

A

Debt-to-total assets ratio is calculated as follows:

Total liabilities
/ Total Assets
= Debt-to-total assets

Debt to total assets measures the proportion of total assets financed with debt and therefore, the extent of financial leverage

63
Q

How do you calculate a firm’s Debt-to-Equity Ratio?

Debt Utilization Ratio

A

Debt-to-Equity ratio is calculated as follows:

Total liabilities
/ Total Equity
= Debt-to-Equity

Debt to equity measures the extent of the firm’s financial leverage

64
Q

How do you calculate a firm’s Price / Earnings (PE) ratio?

Market Ratio

A

Price / Earnings ratio is calculated as follows:

Stock price per share
/ EPS
= Price / Earnings ratio

Price / earnings (PE) ratio is the most commonly quoted market measure

65
Q

How do you calculate a firm’s Market / Book Ratio?

Market Ratio

A

Market / Book ratio is calculated as follows:

Book value per share =

Common stockholders Equity **
/ # of shares of Common stock outstanding ***

** - Formula is:
Total SHE
- P/S par value
- P/S dividends (including in arrears)
- P/S liquidating premium
= SHE for Common stockholders

*** - remember that treasury stock is issued but NOT outstanding. So this amount excludes treasury stock

66
Q

How do you calculate a firm’s Times interest earned ratio?

Debt Utilization Ratio

A

Times interest earned ratio is calculated as follows:

EBIT (Operating Profit or Operating Income)
/ Interest Expense **
= Times interest earned

** - this is usually in the “other expenses & losses” section of the multi-step income statement

Times interest earned measures the firm’s ability to make contractual interest payments

67
Q

What is cross-sectional analysis?

A

Cross-sectional analysis involves benchmarking the ratios against ratios of similar firms at a point in time

68
Q

What is horizontal analysis?

A

Horizontal analysis involves an evaluation of the firm’s ratios and trends over time (i.e. analyzing various ratios for the same company over time - over multiple accounting periods)

69
Q

What is are the different types of benchmarking?

A

Benchmarking is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance

There are 4 different types of benchmarking

  1. Internal benchmarking
  2. Competitive benchmarking
  3. Functional or industry benchmarking
  4. Generic benchmarking
70
Q

What is Internal benchmarking?

A

Internal benchmarking involves comparing similar operations within different units of the same organization

71
Q

What is Competitive benchmarking?

A

Competitive benchmarking targets processes and methods used by an organization’s direct competitors

72
Q

What is Functional or Industry benchmarking?

A

Functional or industry benchmarking involves comparing similar functions within the same broad industry

73
Q

What is Generic benchmarking?

A

Generic benchmarking involves comparing processes that are independent of industry

74
Q

What is Total Quality Management (TQM)?

A

Total quality management focuses on managing the organization to excel in quality in all dimensions of products and services for customers

75
Q

What is Six-sigma?

A

Six-sigma is a statistical measure expressing how close a product comes to its quality goal.

76
Q

What is Six-sigma black belts?

A

Six-sigma black belts must attend a minimum of 4 months of training in statistical and other quality improvement methods

They are experts in six-sigma methodology. They learn and demonstrate proficiency in the DMAIC methodology and statistical process control (SPC) techniques within that methodology

DMAIC is the structured methodology for process improvement within the six-sigma framework

D - Define
M - Measure
A - Analyze
I - Improve
C - Control
77
Q

What is ISO 9000 Series?

A

ISO 9000 series is a series of standards agreed upon by the International Organization for Standardization (ISO) and consist of five parts - 9000 - 9004

78
Q

What is ISO 14000?

A

ISO 14000 series was developed to control the impact of an organization’s activities on the environment and focuses on the
following:

  1. reducing the cost of waste management
  2. conserving energy and materials
  3. lowering distribution costs
79
Q

What is Total quality control (TQC)?

A

Total quality control is the application of quality principles to all company activities. Also known as total quality management (TQM)

80
Q

What is Continuous improvement (CI)?

A

Continuous improvement seeks continual improvement of machinery, materials, labor and production methods, through various means including suggestions & ideas from employees and customers

81
Q

What is Kaizen?

A

Kaizen is the Japanese art of continuous improvement. A philosophy of continuous improvement of working practices that underlies total quality management and just-in-time business techniques

82
Q

What are Cause-and-effect (fishbone or Ishikawa) diagrams?

A

Cause-and-effect (fishbone or Ishikawa) diagrams identify the potential causes of defects

Four categories of potential causes of failure are:

  1. Human factors
  2. Methods & design factors
  3. Machine-related factors
  4. Materials & components factors

Cause-and-effect diagrams are used to systematically list the different causes that can be attributed to a problem (or an effect). These diagrams can aid in identifying the reasons why a process goes out of contro

83
Q

What is a Pareto chart?

A

A Pareto chart is a bar graph that ranks causes of process variations by the degree of impact on quality

The “Pareto Principle” states that 80% of the problems come from 20% of the causes

84
Q

What are Control charts?

A

Control charts are statistical plots derived from measuring factory processes: they help detect “process drift” or deviation before it generates defects

Control charts also help spot inherent variations in manufacturing processes that designers must account for to achieve “robust design”

85
Q

What is Robust design?

A

Robust design is a discipline for making designs “production-proof” by building in tolerances for manufacturing variables that are known to be unavoidable

86
Q

What is Poka-yoke (mistake-proofing)?

A

Poka-yoke involves making the workplace mistake-proof (i.e. a machine fitted with guide rails permits a part to be worked on in just one way)

87
Q

What are the 4 components of the Cost of Quality?

A

Cost of quality is based on the philosophy that failures have an underlying cause, prevention is cheaper than failures, and cost of qualify performance can be measured

Cost of quality consists of 4 components:

  1. Prevention cost
  2. Appraisal cost (also known as detection costs)
  3. Internal failure cost
  4. External failure cost
88
Q

What is Prevention Cost?

One of the 4 components of Cost of Quality

A

The cost of prevention is the cost of any quality activity designed to help do the job right the first time

  1. Maintenance of machines
  2. Training employees
  3. Quality engineering, training, circles, improvement projects
  4. Audits of the effectiveness of the quality system
89
Q

What is Appraisal Cost (Detection cost)?

One of the 4 components of Cost of Quality

A

Appraisal cost (Detection cost) is the cost of quality control including testing and inspection. It involves any activity designed to appraise, test, or check for defective products

In addition, anything involving statistical sampling would be associated with appraisal cost

90
Q

What is Internal failure cost?

One of the 4 components of Cost of Quality

A

Internal failure cost are costs incurred when substandard products are produced, but discovered before shipment to the customer. The following are examples of internal failure costs:

  1. Scrap
  2. Waste
  3. Rework
  4. Rework labor and overhead
  5. Downtime
  6. Debugging software errors
91
Q

What is External failure cost?

One of the 4 components of Cost of Quality

A

External failure cost is the cost incurred for products that do not meet requirements of the customer and have reached the customer

  1. Warranty repairs
  2. Customer complaints
  3. Product recalls
  4. Liability resulting from defective products
  5. Excess returns
  6. Lost sales from returns
  7. Bad press
  8. Excess returns & allowances arising from quality problems
92
Q

What is Business Process Management?

A

Business process management focuses on continuously improving processes to align all activities with the desires and needs of the customer

As a managerial approach, business process management views processes as strategic assets that must be understood, managed, and improved

The life cycle of business process management includes:

  1. Design
  2. Modeling
  3. Execution
  4. Monitoring
  5. Optimization
93
Q

What is the Design phase?

Life cycle of business process management

A

The design phase involves identification of existing processes and design of process improvements

Good process design is critical to preventing problems over the life of the process

94
Q

What is the Modeling phase?

Life cycle of business process management

A

In the modeling phase management simulates the process in a test environment and performs “what if” analysis to try to determine how it will work under varying conditions

95
Q

What is the Execution phase?

Life cycle of business process management

A

The execution phase involves installing software, training personnel, and implementing the new processes

It also involves testing the new processes

96
Q

What is the Optimization phase?

Life cycle of business process management

A

The optimization phase of the life cycle involves retrieving performance statistics from modeling or monitoring and identifying bottlenecks or other problems for additional improvement of the process

As processes are analyzed for improvement, it is sometimes discovered that processes that were once performed by several departments should be centralized in one department (centralization)

Also, management may decided to outsource a process to an external organization or outsource a process to another country (off-shoring)

Benefits of off-shoring may include:

  1. Tax benefit
  2. Scalability
  3. Allows company to focus on its core competencies.

However, there are additional risks such as:

  1. Quality risk
  2. Language risk
  3. Information security risks
  4. Intellectual property risk
  5. Public opinion risk
  6. Social responsibility risk

These risks can be mitigated by implementation of policies & controls including using effective operating agreements

97
Q

What is the Monitoring phase?

Life cycle of business process management

A

The monitoring phase is continuous after the execution phase

It involves tracking the processes with performance statistics

98
Q

What is Reengineering (Business process reengineering)?

A

Reengineering is the fundamental rethinking and redesign of business process to achieve improvements in critical measures of performance such as cost, quality, service speed and customer satisfaction

99
Q

What is Lean manufacturing philosophy?

A

Lean manufacturing is an operational strategy focused on achieving the shortest possible cycle time by eliminating waste

The technique often decreases the time between a customer order and shipment and is designed to improve the following:

  1. Profitability
  2. Customer satisfaction
  3. Throughput time
  4. Employee morale
100
Q

What is the Theory of constraints (TOC)?

A

The theory of constraints refers to methods to maximize operating income when face with some bottleneck operations

The objective of the theory of constraints is to increase throughout contribution while decreasing investment and operating costs

101
Q

What is a Bottleneck resource?

A

Bottleneck resources are any resource or operation where the capacity is less than the demand placed upon it

In other words, demand is greater than capacity

102
Q

What is a Non-bottleneck resource?

A

Non-bottleneck resources have capacity greater than demand

103
Q

What is Throughput contribution?

A

Throughput contribution is the following:

Revenue
Less: Direct materials of COGS
= Throughput contribution

104
Q

What are operating costs?

A

Operating costs include the following:

  1. Salaries & wages
  2. Rental expense
  3. Utilities
  4. Depreciation
105
Q

What is Investment?

A

Investment is considered to be the sum of following costs:

  1. Materials
  2. Indirect materials
  3. WIP
  4. Finished goods inventories
  5. R&D
  6. Equipment & buildings
106
Q

When the NUMERATOR > DENOMINATOR, what will the effect be on a ratio when the numerator and denominator are INCREASED by the same amount?

(Conceptual Theory - Ratio Analysis)

A

In a ratio where the numerator is GREATOR than the denominator, if we INCREASE the numerator and dominator by an equal amount, this actually DECREASES the ratio from the starting point

107
Q

When the NUMERATOR > DENOMINATOR, what will the effect be on a ratio when the numerator and denominator are DECREASED by the same amount?

(Conceptual Theory - Ratio Analysis)

A

In a ratio where the numerator is GREATOR than the denominator, if we DECREASE the numerator and dominator by an equal amount, this actually INCREASES the ratio from the starting point

108
Q

When the DENOMINATOR > NUMERATOR, what will the effect be on a ratio when the numerator and denominator are INCREASED by the same amount?

(Conceptual Theory - Ratio Analysis)

A

In a ratio where the denominator is GREATOR than the numerator, if we INCREASE the numerator and dominator by an equal amount, this actually INCREASES the ratio from the starting point

109
Q

When the DENOMINATOR > NUMERATOR, what will the effect be on a ratio when the numerator and denominator are DECREASED by the same amount?

(Conceptual Theory - Ratio Analysis)

A

In a ratio where the denominator is GREATOR than the numerator, if we DECREASE the numerator and dominator by an equal amount, this actually DECREASES the ratio from the starting point

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