segment reporting Flashcards
What are the key learning objectives of ROI analysis?
Understand and measure ROI, residual income, and evaluate segment performance.
What is the formula for ROI?
ROI = Operating Income / Average Operating Assets.
What is another way to express ROI?
ROI = Margin x Turnover.
What is the formula for margin?
Margin = Operating Income / Sales.
What is the formula for turnover?
Turnover = Sales / Average Operating Assets.
What is residual income (RI)?
The income left after subtracting the required return on average operating assets from operating income.
What is the formula for residual income?
RI = Operating Income – (Average Operating Assets x Required Rate of Return).
Why is residual income used?
To evaluate profitability in absolute terms and to align decisions with company goals.
What is the disadvantage of ROI?
May lead to rejecting profitable projects if they lower the overall ROI.
How can ROI be improved?
Increase margin or turnover by raising revenues, reducing costs, or optimizing assets.
What are the types of operating assets?
Cash, receivables, inventory, PPE, and intangibles.
What is decentralization in organizations?
Delegating decision-making authority to lower-level managers.
What are the advantages of decentralization?
Faster decision-making, managerial development, and local responsiveness.
What are the disadvantages of decentralization?
Risk of goal misalignment, duplication of efforts, and lack of uniformity.
What is the purpose of a balanced scorecard?
To evaluate performance using financial and non-financial metrics.
What are the categories of a balanced scorecard?
- Financial, 2. Customer, 3. Internal Process, 4. Learning and Growth.
What are common financial metrics in the balanced scorecard?
Net income, ROI, residual income, and cash flow.
What is the importance of non-financial metrics?
To measure customer satisfaction, internal efficiency, and employee development.
What is a responsibility center?
A part of the organization for which a manager is responsible for costs, revenues, or investments.
What are the types of responsibility centers?
- Cost center, 2. Revenue center, 3. Profit center, 4. Investment center.
What is the role of performance evaluation metrics?
To assess efficiency, profitability, and goal alignment across segments.
CMR formula
CM/sales
additional Contribution from sales increase
sales increase x CMR
segment margin formula. segment reporting
CM-traceable fixed expenses
operating income in segment reporting
total segment margins - common fixed expenses
segment margin ratio (CMR FOR THE SEGMENT)
segment margin / sales
using the gross cost method
this method eliminates both the age of equipment and the method of depreciation as factors in ROI calculations
what do shareholders care about in terms of segment reporting
absolute profitability
if the queston asks whether a new investment generates more profit, regardless of its impact on ROI
you have to calculate the additional operating income
cost centre definition
controls costs only
profit centers definition
control both costs and revenues
investment centers definition
control costs, revenues and investments
how are cost centers evaluated
on cost efficiency
how are profit centers evaluated
evaluated on profitability
how are investment centers evaluated
evaluated using metrics like ROI and residual income
