U2 Measuring Financial Performance

Question 1

A coach of a football team needs to know the running score of the game in order to assess whether he needs to make changes for the team to win. Additionally, the current position in the national league will likely affect the strategy employed. Managers of corporations need similar information to run the organization.

Answer 1

For business,
the running score are data such as profits, gains and losses, or the market share.

However, analyzing costs or other specific measures alone means little.

The context and position in relation to competitors-the ‘national league’ to draw on the football example-is equally important for the organization’s strategy.

Question 2

Measuring that running and contextual score and using it for better future performance in a business environment is the subject of performance measurement.

Question 3

Measuring that running and contextual score and using it for better future performance in a business environment is the subject of ———————-.

Answer 3

performance measurement.

Question 4

The approaches and concepts behind the practical implementation of performance measurement are numerous and diverse in nature. There is no—————————-or ———————————–which will work in every context and organization.

Answer 4

‘one-size-fits-all’

‘standard recipe’

Question 5

This means that performance measurement is often challenging and requires?

Answer 5

a good understanding of the organization and its core business processes.

Question 6

Complicating matters further is the fact that ?
We will define it here as “regular measurement of the results or outcomes and efficiency of services or programs”. One of the critical aspects of this definition is the regular measurement of results or outcomes.

Answer 6

performance measurement has many different meanings.

Question 7

Complicating matters further is the fact that ?

Answer 7

performance measurement has many different meanings.

Question 8

We will define it here as ?

Answer 8

“regular measurement of the results or outcomes and efficiency of services or programs”.

Question 9

One of the critical aspects of this definition is the regular measurement of ?

Answer 9

results or outcomes.

Question 10

Regular measurement is necessary in order to make progress towards ?

Answer 10

specified outcomes and it is a vital component of any customer-oriented process.

Question 11

Regular measurement is necessary in order to make progress towards ?

Answer 11

specified outcomes and it is a vital component of any customer-oriented process.

Question 12

Data quality is another essential requirement, because?

Answer 12

if things are not accurate, those using the information will be misled and bad decisions will likely ensue.

Question 13

The following statements, often used in the context of performance measurement, stress the importance of identifying the right metrics for a business:

Answer 13

=“You cannot manage what you cannot measure.
=“What gets measured gets done.”
=“Measurement influences behavior.”

Question 14

It is commonly believed that early performance measurement systems have their origin in
?

Answer 14

accounting systems.

Question 15

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 16

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 16

The more industrial organizations developed, the greater the need for?

Question 17

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 18

The more industrial organizations developed, the greater the need for?

Question 19

The more industrial organizations developed, the greater the need for?

Answer 19

certain measures to determine their effectiveness.

Question 20

Current management accounting developed in the US between?
the 1850s and 1920s when industrial organizations moved from piece-work payment systems to wages, single efforts to multiple operations, individual production plants to vertical integrated businesses, and individual businesses to multi-divisional organi­zations.

Answer 20

the 1850s and 1920s

Question 21

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Question 22

Current management accounting developed in the US between?

Answer 22

the 1850s and 1920s

Question 23

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 23

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 24

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?
standard costing, variance analysis, flexible budgets, return on investment, and other key management ratios. From these beginnings, the use of budgets spread widely.

Question 24

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 25

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 25

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 25

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 25

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 25

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 26

The period from 1925 to the 1980s was not characterized by?
inappropriate indicators for businesses effectiveness. The main criticism was focused on the dysfunctional actions of the traditional accounting-based performance measures, especially when used inappropriately.

Answer 26

significant changes in the development of management accounting.

Question 27

However, beginning from the 1980s, traditional accounting measures were criticized as ?

Question 28

The period from 1925 to the 1980s was not characterized by?
The main criticism was focused on the dysfunctional actions of the traditional accounting-based performance measures, especially when used inappropriately.

Answer 28

significant changes in the development of management accounting.

Question 29

However, beginning from the 1980s, traditional accounting measures were criticized as ?

Answer 29

inappropriate indicators for businesses effectiveness.

Question 30

The period from 1925 to the 1980s was not characterized by?

Answer 30

significant changes in the development of management accounting.

Question 31

The main criticism was focused on ?

Answer 31

the dysfunctional actions of the traditional accounting-based performance measures, especially when used inappropriately.

Question 32

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 32

They were also criticized for ?

Answer 32

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 32

Critics feared these criticisms had the potential to damage?

Answer 32

not only individual businesses,

but the entire economy.

Question 33

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 33

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 33

The main criticism was focused on ?

Answer 33

the dysfunctional actions of the traditional accounting-based performance measures, especially when used inappropriately.

Question 33

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 33

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 34

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 34

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 34

The main criticism was focused on ?

Answer 34

the dysfunctional actions of the traditional accounting-based performance measures, especially when used inappropriately.

Question 35

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 35

Critics feared these criticisms had the potential to damage?

Answer 35

not only individual businesses,

but the entire economy.

Question 35

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 35

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 36

They were also criticized for ?

Answer 36

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 36

Considering this historical context, it is not surprising that corporate performance has tradi­tionally been understood in——————– terms. Still today, financial information is the most widely available information source on companies. One of the main reasons for this is the requirement imposed by regulators and supervisors on companies to disclose certain financial information.

Answer 36

financial

Question 37

Considering this historical context, it is not surprising that corporate performance has tradi­tionally been understood in——————– terms. Still today, financial information is the most widely ———— information source on companies. One of the main reasons for this is the —————————————————————————————— on companies to disclose certain financial information.

Answer 37

financial

available

requirement imposed by regulators and supervisors

Question 38

The extent to which financial information must be disclosed is dependent upon?

Answer 38

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 39

Performance measures focusing on financial aspects can be divided into two main types:

Answer 39

=Measures based on accounting data
=Market-based measures derived from stock or other financial market values

Question 40

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 40

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 40

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 40

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 40

Accounting-Based Performance Measures

Traditional accounting-based performance measures are characterized as being?

Answer 40

financially-­based,
internally-focused,
retrospective,
and more concerned with local departmental performance rather than with the overall performance of the business.

Question 40

They were also criticized for ?

Answer 40

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 41

The extent to which financial information must be disclosed is dependent upon?

Answer 41

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 42

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 43

The validity of these measures has been extensively ——————— and the main focus has been on ————–mea­sures.

neoclassical economists and classical management, which ultimately sees the legitimate objective of any private organization as maximizing profits.

Answer 43

examined

profitability

Question 44

The search for and interest in profitability measures is in line with ?

Question 45

The extent to which financial information must be disclosed is dependent upon?

Answer 45

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 45

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 46

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 46

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 47

The validity of these measures has been extensively ——————— and the main focus has been on ————–mea­sures.

Answer 47

examined

profitability

Question 48

The search for and interest in profitability measures is in line with ?

Answer 48

neoclassical economists and classical management, which ultimately sees the legitimate objective of any private organization as maximizing profits.

Question 49

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 49

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 49

The financial statement is a public document which is targeted at the main user groups which include:

Answer 49

investors
shareholders
employees
lender
ssuppliers
customers
government
the public

Question 50

The extent to which financial information must be disclosed is dependent upon?

Answer 50

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 50

From a high-level perspective such performance comparisons and analysis may include:

Answer 50

=Comparison of current year’s results with the previous year to identify trends and performance drivers within the organization

=The current year’s results in comparison with the results of companies in the same line of business, in order to establish whether the organization is performing better or worse than its competitors

=Current performance against a standard or benchmark of performance

Question 50

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 50

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 50

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 50

The various user groups have different interests in the business and consequently apply a series of accounting ratios to interpret and appraise financial performance based on?

Answer 50

their information needs.

Question 50

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 50

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 51

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 51

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 51

They were also criticized for ?

Answer 51

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 52

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 52

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 52

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 52

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 52

They were also criticized for ?

Answer 52

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 53

The extent to which financial information must be disclosed is dependent upon?

Answer 53

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 54

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 54

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 54

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 55

The various user groups have different interests in the business and consequently apply a series of accounting ratios to interpret and appraise financial performance based on?

Answer 55

their information needs.

Question 55

From a high-level perspective such performance comparisons and analysis may include:

Answer 55

=Comparison of current year’s results with the previous year to identify trends and performance drivers within the organization

=The current year’s results in comparison with the results of companies in the same line of business, in order to establish whether the organization is performing better or worse than its competitors

=Current performance against a standard or benchmark of performance

=Comparisons of one segment or division of a business with others, so as to establish which parts of the business are achieving their goals

Question 56

Financial performance indicators included in the financial statement can be presented in the form of?

Answer 56

ratios and cover a number of concepts.

Question 57

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 57

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 57

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 57

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 58

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 58

The extent to which financial information must be disclosed is dependent upon?

Answer 58

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 58

These concepts can be grouped as follows:

Answer 58

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 58

They were also criticized for ?

Answer 58

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 59

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 59

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 59

Financial performance indicators included in the financial statement can be presented in the form of?

Answer 59

ratios and cover a number of concepts.

Question 60

Within each of these groups, there are numerous ratios which can be built and applied with?

Answer 60

basically no limit to the creativity of ‘inventing’ new ratios.

Question 61

Within each of these groups, there are numerous ratios which can be built and applied with basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be ?

Answer 61

Within each of these groups, there are numerous ratios which can be built and applied with?
basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be

Question 62

They were also criticized for ?

Answer 62

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 62

The extent to which financial information must be disclosed is dependent upon?

Answer 62

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 62

These concepts can be grouped as follows:

Answer 62

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 62

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 62

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 62

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 63

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 63

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 63

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 63

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 63

Within each of these groups, there are numerous ratios which can be built and applied with basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be ?

Answer 63

the objective that these figures are supposed to accomplish, which highly depends on the context.

Question 64

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 64

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 64

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 64

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 64

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 65

The extent to which financial information must be disclosed is dependent upon?

Answer 65

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 65

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 65

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 65

For example, organizations which provide credit to their customers have a need to?

Answer 65

control their debtors through debtors’ ba­­lances, presented on a monthly basis.

Those who have a significant investment in stock should implement controls through perpetual inventory records.

Regular debtor and inventory reports will help prevent too much capital being tied up in these areas and allow for prompt follow up action.

Such actions can include changing inventory ordering patterns and allowing for immediate follow-up on debtors to prevent ‘bad’ debts.

Question 65

Within each of these groups, there are numerous ratios which can be built and applied with basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be ?

Answer 65

the objective that these figures are supposed to accomplish, which highly depends on the context.

Question 65

They were also criticized for ?

Answer 65

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 66

These concepts can be grouped as follows:

Answer 66

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 67

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 67

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 67

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 67

For example, organizations which provide credit to their customers have a need to control their debtors through?

Answer 67

debtors’ ba­­lances, presented on a monthly basis.

Those who have a significant investment in stock should implement controls through perpetual inventory records.

Regular debtor and inventory reports will help prevent too much capital being tied up in these areas and allow for prompt follow up action.

Such actions can include changing inventory ordering patterns and allowing for immediate follow-up on debtors to prevent ‘bad’ debts.

Question 67

These concepts can be grouped as follows:

Answer 67

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Answer 67

Although the use of specific accounting-based performance figures depends very much on the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 67

Within each of these groups, there are numerous ratios which can be built and applied with basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be?

Answer 67

the objective that these figures are supposed to accomplish, which highly depends on the context.

Question 67

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 67

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 67

They were also criticized for ?

Answer 67

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 67

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 67

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 68

The extent to which financial information must be disclosed is dependent upon?

Answer 68

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Answer 69

Although the use of specific accounting-based performance figures depends very much on the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 69

These concepts can be grouped as follows:

Answer 69

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 69

For example, organizations which provide credit to their customers have a need to control their debtors through?

Answer 69

debtors’ ba­­lances, presented on a monthly basis.

Those who have a significant investment in stock should implement controls through perpetual inventory records.

Question 69

The extent to which financial information must be disclosed is dependent upon?

Answer 69

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 69

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 69

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 69

Within each of these groups, there are numerous ratios which can be built and applied with basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be?

Answer 69

the objective that these figures are supposed to accomplish, which highly depends on the context.

Question 70

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 70

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 70

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 70

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 70

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 70

They were also criticized for ?

Answer 70

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 71

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 71

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 71

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 71

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 71

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 71

Within each of these groups, there are numerous ratios which can be built and applied with basically no limit to the creativity of ‘inventing’ new ratios. However, a guiding principle of building and analyzing performance ratios should be?

Answer 71

the objective that these figures are supposed to accomplish, which highly depends on the context.

Question 71

These concepts can be grouped as follows:

Answer 71

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 71

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 71

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 71

For example, organizations which provide credit to their customers have a need to control their debtors through?

Answer 71

debtors’ ba­­lances, presented on a monthly basis.

Those who have a significant investment in stock should implement controls through perpetual inventory records.

Question 72

They were also criticized for ?

Answer 72

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 72

The extent to which financial information must be disclosed is dependent upon?

Answer 72

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Answer 72

Regular debtor and inventory reports will help prevent too much capital being tied up in these areas and allow for prompt follow up action.

Such actions can include changing inventory ordering patterns and allowing for immediate follow-up on debtors to prevent ‘bad’ debts.

Answer 72

Although the use of specific accounting-based performance figures depends very much on the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 73

Although the use of specific accounting-based performance figures depends very much on?

Answer 73

the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 74

Return on equity (ROE):

Answer 74

Calculates the earnings over a shareholder’s equity.
It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

Question 75

image

Question 76

performance measures

Answer 76

=Return on equity (ROE):
=Return on assets (ROA):
=Return on investment (ROI):
=Earning per share (EPS):
=Dividend payout-ratio:
=Cash flow:
=Stock turnover-days:
=Receivables turnover ratio:
=Receivables turnover ratio:
=Debt\/equity ratio:
=Interest coverage ratio:
=Gross profit margin:
=Breakeven sales:
=Price-to-book ratio (P\/B ratio):
=Price-to-earnings ratio (P\/E ratio):
=Dividend yield:
=Net present value (NPV):
=Internal rate of return (IRR):

Question 77

Return on assets (ROA):

Answer 77

This is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. This ratio is calculated by dividing a company’s annual earnings by its total assets.

Question 78

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Question 79

Return on investment (ROI):

Answer 79

Represents the after-tax return which owners are receiving on their investment and should be compared with alternative forms of investment.

Question 80

The extent to which financial information must be disclosed is dependent upon?

Answer 80

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 80

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 81

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 81

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 81

Return on investment (ROI):

Answer 81

Represents the after-tax return which owners are receiving on their investment and should be compared with alternative forms of investment.

Question 81

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 81

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 82

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Question 83

Earning per share (EPS):

Answer 83

The portion of a company’s profit allocated to weighted outstanding shares. EPS serves as an indicator of a company’s profitability.

Question 84

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Question 85

Dividend payout-ratio:

Answer 85

Calculates the percentage of earnings paid to shareholders in dividends in a specific period. A stable dividend payout ratio indicates a solid dividend policy by the company’s board of directors.

Question 86

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Question 87

Cash flow:

Answer 87

There are different definitions for cash flows and different types of cash flows (e.g. free cash flow, operational cash flows, etc.). For practical purposes earnings plus depreciations can be used as a simple approximation.

Question 88

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 88

The extent to which financial information must be disclosed is dependent upon?

Answer 88

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 89

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 89

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 90

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 90

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 91

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 91

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Question 91

image

Question 91

Cash flow:

Answer 91

There are different definitions for cash flows and different types of cash flows (e.g. free cash flow, operational cash flows, etc.). For practical purposes earnings plus depreciations can be used as a simple approximation.

Question 91

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 91

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 91

image

Answer 91

Although the use of specific accounting-based performance figures depends very much on the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 91

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 91

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 92

They were also criticized for ?

Answer 92

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 92

These concepts can be grouped as follows:

Answer 92

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 92

Return on equity (ROE):

Answer 92

Calculates the earnings over a shareholder’s equity.
It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

Question 92

The extent to which financial information must be disclosed is dependent upon?

Answer 92

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 93

Return on investment (ROI):

Answer 93

Represents the after-tax return which owners are receiving on their investment and should be compared with alternative forms of investment.

Question 93

Although the use of specific accounting-based performance figures depends very much on?

Answer 93

the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 94

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 95

From this list of traditional performance measures, many analysts and investors tend to focus on ?

Answer 95

ROE as a primary measure of company performance. As a result, many executives also strongly focus on this metric, recognizing that it is the one that seems to get most attention from the investor community. On the other hand, ROE can obscure a lot of potential problems.

Question 96

If investors are not careful, it can divert attention from?

Answer 96

business fundamentals.

Question 97

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 97

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 97

In this unit we will review some of the traditional models of performance measurement with a focus on financial key­ figures before we draw our attention to some of the more recent ap­proaches to performance measurement.

Reviewing Traditional Models of Financial Performance Measurement

Question 97

The extent to which financial information must be disclosed is dependent upon?

Answer 97

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 97

If investors are not careful, it can divert attention from?
Growing debt leverage and stock buybacks, funded through accumulated cash, can help to maintain a company’s ROE even if operational profitability is eroding. Mounting competitive pressure combined with artificially low interest rates, characteristic of the last decades, creates a potent incentive to engage in these strategies in order to keep investors happy.

Answer 97

business fundamentals.

Question 97

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 97

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 98

Organizations can resort to financial strategies and therefore artificially maintain a healthy ROE temporarily while?

Answer 98

hiding deteriorating performance in business fundamentals.

Question 99

Mounting competitive pressure combined with ?

Answer 99

artificially low interest rates,
characteristic of the last decades,
creates a potent incentive to engage in these strategies in order to keep investors happy.

Question 99

Return on investment (ROI):

Answer 99

Represents the after-tax return which owners are receiving on their investment and should be compared with alternative forms of investment.

Question 99

Organizations can resort to financial strategies and therefore artificially maintain a healthy ROE temporarily while?

Answer 99

hiding deteriorating performance in business fundamentals.

Question 99

The extent to which financial information must be disclosed is dependent upon?

Answer 99

the public or private character of the company, its size, and whether the company is listed on a stock exchange or not.

Question 99

These concepts can be grouped as follows:

Answer 99

profitability
liquidity
utilization
financial structur
einvestment–shareholder ratios

Question 100

The minimum accounting-based financial information for any business is compiled in the form of ?

Answer 100

periodic financial statements which consist of (at least) a balance sheet and a profit and loss statement.

Question 100

They were also criticized for ?

Answer 100

encouraging short-term deci­sion-making as well as for their inapplicability to modern manufacturing techniques.

Question 100

After World War I, companies such as du Pont, Sears Roebuck, and General Motors started to use sophisticated budgeting and management accounting techniques, such as?

Answer 100

standard costing,
variance analysis,
flexible budgets,
return on investment,
and other key management ratios.

From these beginnings, the use of budgets spread widely.

Answer 100

Although the use of specific accounting-based performance figures depends very much on the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 100

Return on equity (ROE):

Answer 100

Calculates the earnings over a shareholder’s equity.
It measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

Question 100

Growing debt leverage and stock buybacks, funded through/

Answer 100

accumulated cash, can help to maintain a company’s ROE even if operational profitability is eroding.

Question 100

Current management accounting developed in the US between the 1850s and 1920s when industrial organizations moved from ?

Answer 100

piece-work payment systems to wages,
single efforts to multiple operations,
individual production plants to vertical integrated businesses,
and individual businesses to multi-divisional organi­zations.

Question 100

Cash flow:

Answer 100

There are different definitions for cash flows and different types of cash flows (e.g. free cash flow, operational cash flows, etc.). For practical purposes earnings plus depreciations can be used as a simple approximation.

Question 100

Although the use of specific accounting-based performance figures depends very much on?

Answer 100

the objective and specific context, some performance measures have gained prominence and are frequently used.

Question 100

image

Question 101

From this list of traditional performance measures, many analysts and investors tend to focus on?

Answer 101

ROE as a primary measure of company performance. ?

Question 102

As a result, many executives also strongly focus on?

Answer 102

this metric, recognizing that it is the one that seems to get most attention from the investor community.

Question 103

On the other hand, ROE can obscure a lot of potential problems. If investors are not careful?

Answer 103

it can divert attention from business fundamentals. Organizations can resort to financial strategies and therefore artificially maintain a healthy ROE temporarily

while hiding deteriorating performance in business fundamentals. Growing debt leverage and stock buybacks, funded through accumulated cash, can help to maintain a company’s ROE even if operational profitability is eroding.

Question 104

Mounting competitive pressure combined with artificially low interest rates, characteristic of the last decades, creates?

Answer 104

a potent incentive to engage in these strategies in order to keep investors happy.

Question 105

If underlying profitability continues to deteriorate, ———————————————————————————will be necessary to maintain an attractive return on equity.

Answer 105

more stock buybacks or debt leverage

Question 106

Therefore, the company is increasingly vulnerable to?

Answer 106

unanticipated downturns in consumer demand or financial market crises.

Question 107

But allowing ROE to decline is often too —————————-to contemplate, since the impact on stock performance can be ——————–. The ———-on the other side are less immediate and less quantifiable, so there is an understandable temptation to avoid ——————————– in this way.

Answer 107

painful
immediate
risks
immediate pain

Question 108

These issues with ROE led some companies to?

Answer 108

pick a different bottom-line metric for corporate financial performance.

Question 109

This is return on assets (ROA) which receives far less attention from?

Answer 109

executives and investors alike when seeking to analyze long-term profitability trends across all public organizations.

Question 110

Return on assets avoids the potential distortions created by?

Answer 110

financial strategies such as those mentioned above.

Question 111

At the same time, ROA is a better metric of financial performance than?

Answer 111

income statement profitability measures such as return on sales. ROA explicitly considers the assets used to support business activities.

Question 112

It determines whether the organization is able to?

Answer 112

generate an adequate return on these assets, rather than simply showing robust return on sales.

Question 113

Asset-heavy business organizations need a higher level of?

Answer 113

net income to support the business, whereas asset-light organizations can generate a very healthy return on assets on thin margins.

Question 114

Many organizations outsource asset intensive manufacturing and logistics operations to more?

Answer 114

specialized providers in an effort to create ‘asset-light’ businesses.

Question 115

Those assets have not gone away-they have simply shifted from one organization to another. Someone has to earn a reasonable return on those asset investments. Even intrinsically ‘asset-light’ businesses have some limited current and fixed assets required to?

Answer 115

support the business.

Question 116

Using ROA as a key performance metric quickly focuses management attention on?

Answer 116

the assets required to run the business.

Question 117

The key question is who is in the best position to earn the highest return on those assets?

Answer 117

This question helps executive teams to focus their own operations more intently on the activities and assets they are best qualified to manage and to branch out other activities and assets to more specialized organizations.

Question 118

This is a powerful alternative form of leverage, namely ————————————-. Excessive f

Answer 118

capability leverage.

Question 119

inancial leverage can become a ?

Answer 119

large and inescapable burden in an economic downturn.

Question 120

Capability leverage, in contrast, supports?

Answer 120

a business through all phases of the economic cycle.

Question 121

Due to the scale and diversity of their operations, specialized outsourcing providers can supply?

Answer 121

key assets and capabilities quickly and more profitably to help companies ramp up their production rapidly during an economic upturn.

Question 122

Variable cost outsourcing arrangements support scaling back during ————————. That said, readily available financial leverage often helps to ————————————————-, leading many companies to neglect the potential of———————————————–.

Answer 122

downturns

increase returns for shareholders

capability leverage

Question 123

In addition to the abovementioned ‘traditional’ accounting-based performance measures?

Answer 123

(in particular ROE and ROA), other key financial performance indicators are used and monitored widely.

Question 124

Stock turnover-days:

Answer 124

Reflects the number of times inventory is sold or used in a
time period. The lower the ratio, the quicker the stock is sold.

Question 125

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Question 126

This ratio can be used to calculate the average days it takes to sell the inventory:

Answer 126

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Question 127

Receivables turnover ratio:

Answer 127

Reflect average length of time from sale to cash collection. The lower the ratio, the quicker an account is paid. From a cash flow perspective, it is important to keep the time lag to a minimum.

Question 128

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Question 129

The average days to collect receivables can be calculated as:

Answer 129

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Question 130

Current assets\/liability ratio:

Answer 130

Indicates the extent to which current assets cover current liabilities and is a way to measure the ability to meet short-term obligations. The rough rule of thumb is a ratio of 2:1. That is for every €1 of liabilities (within 12 months), there should be at least €2 in current assets to meet such liabilities.

Question 131

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Question 132

Debt\/equity ratio:

Answer 132

This is a way to measure the extent to which a business relies on external borrowings to fund its ongoing operations. The higher the ratio, the more heavily debt financing is used. In order to provide a reliable measure, assets should be valued at market value.

Question 133

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Question 134

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Question 135

Interest coverage ratio:

Answer 135

Provides a way to measure the ability of the business to meet its interest commitments through profits and is linked to the debt\/equity ratio. The rough rule of thumb used by banks is a ratio of 3:1. That is earnings before interest and taxes (EBIT) exceeding interest expense threefold.

Question 136

Gross profit margin:

Answer 136

An indication of the profitability of the business and a reflection of control over cost of goods sold (COGS) and pricing policies. This ratio should be com­pared to prior periods and to any available industry data.

Question 137

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Question 138

Breakeven sales:

Answer 138

Reflects the sales which need to be generated in order to cover expenses. In other words, this is the level of activity at which neither profit nor losses are incurred, or where total costs equate with total revenue. This is a very important ratio which every business should monitor on a monthly basis.

Question 139

In addition to these metrics which are mainly based on ?

Answer 139

historical annual totals, one of the key financial performance indicators an organization should prepare on a monthly basis is a profit and loss budget for at least a 12-month period.

Question 140

It is vitally important to assess the impact that these projections have on?

Answer 140

the future cash flow of the business.

Question 141

Budgets should be compared to ?

Answer 141

actual results and variances acted upon on a timely basis.

Question 142

The following table shows an example of a profit and loss budget.

Question 143

table Example of Profit and Loss Budget

Question 144

table

Question 145

table

Question 146

Excepting this budget, all of the different accounting-based financial measures are?

Answer 146

retrospective and depict the company’s performance over the past year or several previous years.

Question 147

This is one of the most criticized aspects of accounting-based performance measures:

Answer 147

-they only reflect a company’s former achievements which are not always indicative of future developments.

-These measures show the results of the business after events have occurred and as such are ‘lagging’ indicators.

Question 148

In addition, account­ing-based measures have further weakness. Since some accounting rules are not static and leave room for interpretation, accounting measures can be?

Answer 148

misleading, if they have been ‘massaged’ or ‘window dressed’ in such a way that they do not provide a true reflection of the company’s results.

Especially when it comes to the comparison of performance figures between companies from different countries, accounting-based mea­sures reveal another weakness.

Question 149

Accounting principles (e.g. US-GAAP and IFRS) can differ significantly from country to country with respect to?

Answer 149

goodwill, taxation, valuation of inventories, and capitalization of losses.

Question 150

This inevitably leads to different performance figures. As a result, it could be possible that

Answer 150

the same company reports a loss based on one country’s accounting principles and a gain based on another set of accounting principles.

Question 151

To overcome the weaknesses of accounting-based measures, there is a need for ?

Answer 151

more frequent reporting periods and to gather more essential data as well as making use of other financial and non-financial indicators.

Question 152

simple examples of alternative indicators could be?

Answer 152

number of enquiries, number of customers per day, average sales value, number of quoted jobs lost, customer satisfaction, etc.

Question 153

Thus, for more accurate results, financial statements and other key performance indicators (KPIs) should be?

Answer 153

prepared on a regular and consistent basis and compared with earlier periods.

Question 154

Monitoring performance via using successive monthly or quarterly accounts can show?

Answer 154

trends that otherwise might not be apparent.

Question 155

Knowing the financial position becomes?

Answer 155

even more important as the business grows.

Question 156

Lack of precise and timely knowledge of the current financial position can lead to?

Answer 156

business failure and have other consequences for the owners, stakeholders, and employees.

Question 157

Performance Measures

Question 158

Market-Based Performance
MeasuresMarket-based measures of financial performance are completely different from?

Answer 158

accounting-­based metrics.

Question 159

While accounting-based performance measures focus on?

Answer 159

the companies past performance, market-based measures reflect the present value of future streams of income.

Question 160

These figures fluctuate daily and incorporate?

Answer 160

internal as well as external factors and developments in the valuation.

Question 161

Market Value Added and Total Market Value

Answer 161

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Question 162

A central concept of market-based performance figures is ?

Answer 162

market capitalization, which is defined as the total market value of all shares of a company.

Question 163

The current market capitalization can be calculated by ?

Answer 163

multiplying the number of shares of a company with the current price per share on the stock market.

Question 164

If the market capitalization plus the market value of debt (i.e. ————————————————-) is higher than the capital contributed by investors (——————————————), the management of the company has created value and this additional value is called ——————————————————(MVA).

Answer 164

total market value of a company

both equity and debt

market value added

Question 165

(MVA) is simply calculated as?

Answer 165

the difference between the company’s market capitalization and the shareholders’ equity plus debt.

Question 166

The shareholders’ equity is made up of?

Answer 166

the share capital and any retained profits of the organization.

Question 167

Both figures are important information, but as we will learn in the next section, the idea of market capitalization and market value added has laid the foundation for?

Answer 167

other more recent non-accounting-based performance concepts.

Question 168

However, before we introduce these concepts, we will focus on some of the traditional market-based performance measures. The most common measures are as follows:

Answer 168

-Price-to-book ratio (P\/B ratio):
-Price-to-earnings ratio (P\/E ratio):
-Dividend yield:

Question 169

Price-to-book ratio (P\/B ratio):

Answer 169

This ratio is used to compare a stock’s market value with its book value. It is calculated by dividing the current market capitalization by the latest quarter‘s book value of the shareholders’ equity.

Question 170

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Question 171

Price-to-earnings ratio (P\/E ratio):

Answer 171

A valuation ratio of a company’s market capitalization to its earnings.

Question 172

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Question 173

Alternatively, this ratio can also be calculated as the current share price divided by?

Answer 173

the per-share earnings (EPS).

Question 174

The P\/E ratio is sometimes referred to as the ‘multiple’, because it shows?

Answer 174

how much investors are willing to pay per dollar of earnings.

Question 175

If a company were for example :

Answer 175

trading at a multiple (P\/E) of 20, the interpretation is that an investor is willing to pay €20 for €1 of current earnings.

Question 176

Dividend yield:

Answer 176

This figure shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

Question 177

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Question 178

In general, high measures indicate well-performing companies. But this is not always the case and depends very much on?

Answer 178

the circumstances and on the sector a company is operating in.

Question 179

For example, :

Answer 179

a high P\/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P\/E and it can be a sign of the quality of the management.

However, it also might reflect the poor quality of present performance.

Question 180

Usually, it is better to consider market-based performance measures in relation to?

Answer 180

the entire stock market (national or international), against an industry average, or a subset of organizations in a particular industry.

Question 181

The comparison with the company’s industry is also referred to as?

Answer 181

peer group analysis.

Question 182

To conclude this section there are in addition to the typical market-based measures mentioned above other measures which are not necessarily limited to performance measurement, but are worth mentioning in this context as well. They mainly focus on the performance of ?

Answer 182

individual projects or investments which will ultimately influence the overall performance of an organi­zation.

Question 183

Both measures are based on?

Answer 183

discounted cash flows and to some extent use market-­based values.

Answer 184

-Net present value (NPV):
-Internal rate of return (IRR):

Question 185

Net present value (NPV):

Answer 185

This metric calculates the difference between the present value of cash inflows and cash outflows (Ct) over a period of time (t). It is primarily used in capital budgeting to analyze the profitability of a specific investment or project and is sensitive to the reliability of future cash inflows that an investment or project will yield and the expected rate of return (r).

Question 186

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Question 187

If the net present value of a potential project or investment is positive, it should be?

Answer 187

accepted.

Question 188

On the other hand, if the net present value is negative, the project should be?

Answer 188

rejected because it does not create value for the organization.

Question 189

Internal rate of return (IRR):

Answer 189

The internal rate of return is often used in capital bud­geting. It is the exact interest rate (r) which makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Question 190

Generally speaking, the higher a project’s or an investment’s internal rate of return, the more?

Answer 190

desirable it is to undertake the project or investment.

Question 191

In this context, the IRR can be used to?

Answer 191

prioritize several potential projects a company is considering.

Question 192

Assuming all other factors are equal among the various projects, the project with the highest internal rate of return would probably be?

Answer 192

considered the best and undertaken first.

Question 193

Seen from a different angle,—-can be viewed as the rate of growth a project is expected to generate. Although, in many cases, the actual rate of return that a given project or investment ends up ——————————, will often differ from its———————.

Answer 193

IRR

generating

estimated IRR

Question 194

However, it can be expected that a project with a substantially higher IRR value than other available options would?

Answer 194

still provide a much better chance of strong growth.

Question 195

To illustrate the application, the following table shows an example of net present value and internal rate of return calculation for a potential project or investment.

Answer 195

Example of Internal Rate of Return and Net Present Value

Question 196

The table shows the estimated cash flows for years one to five. For ———————-,

Answer 196

both projects

Question 197

the calculation of the NPV is based on?

Answer 197

an interest rate (r) of 10 %.

Question 198

Since the IRR of is higher than 10 % in both cases, the NPV is ?

Answer 198

positive.

Question 199

Current Trends and Drivers for Performance Measures

Since the introduction of performance measurement as its own discipline, more and more organizations have been taking steps to?

Answer 199

improve their performance measurement capabilities in the light of altered economic and market conditions and new management needs.

Question 200

For example,

Answer 200

new regulatory constraints such as those related to payment-card issuing and pro­cessing are affecting the underlying economics of businesses.

Question 201

Capital requirements are in­­creasing for?

Answer 201

most financial and banking businesses.

Question 202

New channels such as mobile phones are becoming more important. Revenue growth continues to be?

Answer 202

difficult to achieve due to weak economic conditions, low interest rates, and regulatory restrictions.

Question 203

Organizations are trying to improve their management of the cost-effectiveness ratio, deepen relationships with?

Answer 203

customers and enhance product mix and pricing decisions.

Question 204

These and other factors are causing organizations to ?

Answer 204

re-examine and improve the ways in which they measure and recount business performance.

Question 205

The following key areas of performance management are emphasized and marked as central trends which are emerging across the business world:

Answer 205

=reviewing and enhancing organizational management profitability and the methodologies of recounting them
=emphasizing the use of business-unit key performance indicators
=refining customer- and channel-profitability measurement and analytics
=improving alignment of the components of the performance management process
=improving systems support and automation of the performance management process
=improving data quality and consistency

Question 206

As these trends and needs indicate, traditional performance measures are not able to cover all of these requirements. The following sections will introduce

Answer 206

some of the more recent performance measurement concepts addressing these needs.

Question 207

The Economic Value Added (EVA) Metric

As highlighted in the previous section, traditional performance measures have been subject to?

Answer 207

growing criticism and have been largely outgrown by current management needs.

Question 208

Especially in the 1980s, researchers found empirical evidence that?

Answer 208

there is little correlation between historical accounting earning and shareholder value.

Question 209

This highlights that accounting measures are not the only driving force for?

Answer 209

stock market performance of a company.

Question 210

In order to address this critique, analysts, consultants, and researchers have been searching for?

Answer 210

performance measures which are more aligned with the corporate strategy and the long-term value creation.

Question 211

One of the solutions discussed is the shareholder value concept, which is based on ?

Answer 211

the simple idea of measuring the value a company creates or destroys by subtracting a capital charge from the cash returns generated on the capital invested.

Question 212

This is supposed to give an incentive to deci­sion-makers when?

Answer 212

evaluating new projects or business opportunities to view them from an economic profit perspective.

Question 213

Economic profit focuses on?

Answer 213

the returns generated and is different from accounting-based profit,

since it takes into account opportunity costs of the capital employed in the enterprise.

Question 214

The concept of————————————————-expands this approach and additionally builds on the —————————- concept.

Answer 214

economic value added (EVA)

residual income

Question 215

Residual income measures how much?

Answer 215

profit reamains for investment in the business or distribution to the owners after subtracting expected returns on in­­vestment.

Question 216

It is generally defined as the accounting profit minus a charge for capital used to generate?

Answer 216

returns (this is more a conceptual than precise definition of residual income and we will come back to it later in this section):

Question 217

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Question 218

It is expected that a positive residual income should help to ?

Answer 218

increase the total market value of an organization because a positive residual income indicates that a company is accumulating profits at a greater rate then it needs to accummulate in order to satisty the providers of capital.

Question 219

Consequently, the residual income concept has shifted focus from a total profit perspective to?

Answer 219

a ‘net’ profit view that takes into account expected capital returns.

Question 220

The EVA model expands the—————————concept further and tries to measure the difference between the———————- made during a period and the ——————of all resources valued in economic terms consumed in the same period.

Answer 220

residual income

revenue
costs

Question 221

Discounting the stream of all the expected future improvements in EVA helps to?

Answer 221

explain the difference between the total market value of an organization and its debt plus equity capital. In other words, the market value added (MVA) is the present value of all future EVA.

Question 222

Market Value Added and Economic Value Added
image

Question 223

In order to get to a true economic view, adjustments to the ————————————————————– need to be done.

Answer 223

values from the accounting world

Question 224

Stern Stewart has identified?

Answer 224

164 adjustments which can be applied to both the profits and capital employed before arriving at the EVA.

Question 225

Since the adjustments proposed are very specific and focus on?

Answer 225

typical accounting issues, we will not go into details

but instead present the main idea of EVA and how it differs from traditional approaches.

Question 226

Since the adjustments proposed are very specific and focus on?

Answer 226

typical accounting issues, we will not go into details

but instead present the main idea of EVA and how it differs from traditional approaches.

Question 226

The two main differences are:

Answer 226

1-Inclusion of capital costs:
2-Post-tax profits:
3-Interest is not deducted:

Question 227

Inclusion of capital costs:

Answer 227

One of the key features of the EVA model is that it brings balance sheets and therefore cash flow variables into the profit and loss account by charging the organization’s cost of capital as a percentage of the assets em­ployed in the business before the bottom-line profit is calculated.

Question 228

Post-tax profits:

Answer 228

Another main feature of EVA is its focus on post-tax profits rather than operational profit. This incentivizes management to actively take this part into consideration when managing the profit and loss account. Althoug this sounds like a simple modification, for the practical implemention the tax issues add a significant layer of complexity to the EVA model. The resulting number is usually called net profit after tax (NOPAT).

Question 229

Interest is not deducted:

Answer 229

In order to avoid double accounting interest, paid for capital is not deducted from the revenues but it is included in the capital charge for both equity and debt (net working capital).

Question 230

The following table shows the calculation of?

Answer 230

EVA-based profit in comparison with the traditional calculation.

Question 231

Comparison of Traditional and EVA-Based Profit Calculation
image

Question 232

Calculating the Economic Value Added and Other Related Measures

In the previous section we have discussed the main ideas and basics of the economic value added (EVA) model. Earnings before interest and taxes (EBIT), as well as the net operating profit after taxes (NOPAT), are two important measures on the way to EVA calculation.

Answer 232

However, there are other related figures worth mentioning in the context of EVA since they are commonly used. These figures provide an additional and somewhat more precise ‘route’ to arrive at the EVA and highlight the dependence on, yet difference from accounting-based measures.

Question 233

To explore the relationships between various non-traditional measures, one should commence by?

Answer 233

defining a concept of earnings before extraordinary items (EBEI) and then discuss all the additional components required to calculate the measures which lead to the EVA.

Question 234

An organization’s EBEI could be defined as follows:

Answer 234

image

Question 235

where:

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Answer 235

EBEIt is the earnings before extraordinary items and tax for period

t,CFOt is the net cash from operating activities, and

accrual stands for the total operating accruals of the organization.

Question 236

The difference between EBEI and the net operating profit after tax (NOPAT) is that?

Answer 236

NOPAT does not take the after-tax interest expense into account, while EBEI does.

Question 237

Therefore:

Answer 237

image

Question 238

where:

Answer 238

ATIntt is the interest expense after provision for tax.

Question 239

While EBEI makes provision for the cost of debt by?

Answer 239

subtracting the interest expense, residual income (RI) is calculated by deducting the cost of the total (i.e. debt and equity) capital.

Question 240

Organizations which achieve positive RI values are able to generate?

Answer 240

profits in excess of their total cost of capital and consequently shareholder value should be created.

Question 241

Negative RI values are an indication that ?

Answer 241

insufficient profits are generated, and as a result, shareholder value could be destroyed.

Question 242

Finally, EVA is calculated in?

Answer 242

a similar way as RI.

Question 243

The major difference between the two measures relates to?

Answer 243

a number of adjustments to NOPAT and IC.

Question 244

These adjustments are included in the calculation of EVA.

Answer 244

image

Question 245

where

Answer 245

AcctAdjop;t is adjustments to remove the accounting distortions from operating profit, and

AcctAdjc;t is adjustments to remove the accounting distortions from invested capital.

Question 246

Alternative Value-Based Financial Performance Measures

In addition to the EVA concept, a number of value-based financial performance measures have been developed in?

Answer 246

an attempt to guide management actions towards achieving the maximization of shareholder value and ensure that all activities generate positive net present values.

Question 247

All of these value-based measures attempt to include ?

Answer 247

an organization’s cost of capital and to adjust financial statement information in order to remove some of the accounting distortions con­tained in traditional financial performance measures.

Question 248

Performance exceeding the cost of capital is certain to produce value, while the failure to achieve this will result in?

Answer 248

the destruction of shareholder value.

Question 249

Advocates of value-based financial performance measures present those theories as?

Answer 249

a major improvement over the traditional performance measures.

Question 250

Most importantly, by including an organization’s cost of capital in their calculation, they can be applied to assess?

Answer 250

the value creating potential of an organization.

Question 251

If the returns generated by an organization’s projects are in excess of ?

Answer 251

the cost of capital, these projects will generate positive net present values and consequently shareholder value is in­­creased.

Question 252

These value-based management approaches also attempt to overcome?

Answer 252

some of the problems associated with traditional measures.

Question 253

Accounting distortions contained in?

Answer 253

the financial statements are being removed.

Question 254

Cash value added (CVA) is ?

Answer 254

another well-known performance measure and serves as an alternative to economic value added.

Question 255

Cash value added is considered to be?

Answer 255

another form of residual income.

Question 256

This measure calculates the difference between an organizations’ operating cash flow and?

Answer 256

a capital charge based on the gross amount of invested capital.

Question 257

One of the major differences between CVA and EVA is?

Answer 257

that depreciations and accruals are added when calculating the operating cash flow values in CVA.

Question 258

Furthermore, accumulated depreciation is included in ?

Answer 258

the invested capital amount when the gross invested capital is determined.

Question 259

The calculation of CVA is less complex than?

Answer 259

the calculation of EVA since no accounting adjustments are required.

Question 260

Since depreciation is added back during the calculation of?

Answer 260

the CVA, the measure is not influenced by an organization’s depreciation policy.

Question 261

This characteristic of CVA can be seen as?

Answer 261

an advantage over EVA where different depreciation policies can result in large variations in the value of the measure.

Question 262

At the same time, there are a number of limitations with regard to CVA:

Answer 262

=some researchers are of the opinion that EVA can be considered a better financial measure than CVA.

= They also argue that the problem of different depreciation policies in the case of EVA can be solved by including an accounting adjustment.

Question 263

Furthermore, there is an indication that if accruals and depreciation are removed from the calculation of CVA, the measure may lose ?

Answer 263

important information required by the market when evaluating an enterprise.

Question 264

The process of removing the effects of accounting accruals in the calculation of CVA could also be?

Answer 264

relatively complex.

Question 265

Moreover, the incorporation of CVA values into valuation models should be undertaken with special care, since CVA is based on?

Answer 265

historical accounting figures which do not represent the expected future cash flow generated by the enterprise.

Question 266

Cash flow return on investment (CFROI) has been presented by its proponents as?

Answer 266

an improve­ment over some of the other traditional and value-based measures.

Question 267

It is calculated by consid­ering the inflation-adjusted investment in assets, the inflation-adjusted cash flow generated by?

Answer 267

employing these assets in the organization, and determines the yield generated over the estimated lifetime of the assets.

Question 268

The calculation of CFROI is based on ?

Answer 268

basic discounted cash flow principles.

Question 269

The four inputs required to calculate the measure are as follows:

Answer 269

=the average life of the depreciating assets

=the total amount of assets (includes both depreciating as well as non-depreciating assets) adjusted for inflation

=the inflation-adjusted cash flows generated by the assets over their lifetime

=the final inflation-adjusted residual value of the non-depreciating assets at the end of the asset lifetime

Question 270

The company’s cash flow return on investment (CFROI) value is calculated as?

Answer 270

the discount rate which would ensure that the present value of all the future cash flows (i.e. the equal annual inflation-adjusted gross cash flows, as well as the terminal non-depreciating assets amount),

is equal to the initial investment (i.e. total non-depreciating and depreciating assets).

Question 271

As such, the CFROI may be viewed as a return on investment (ROI). However, it is not ?

Answer 271

calculated for individual projects, but rather for the firm as a whole.

Question 272

The cash flow return on investment is compared to the organization’s ———————————- (real) cost of capital. If an organization is able to generate———————— values in excess of its —————————— cost of capital, it should increase its shareholder’s value. CFROI values below the———————————–will result in the destruction of shareholders’ value.

Answer 272

inflation-adjusted

CFROI
inflation-­adjusted

real cost of capital

Question 273

One of the characteristics of this measure is that it focuses on?

Answer 273

the return offered to all the capital providers of the organization and not only to shareholders.

Question 274

On the other hand, relatively little empirical research has been conducted on?

Answer 274

the performance of CFROI in comparison to other financial performance measures.

Question 275

Basic Shared Elements of Value-Based Management

In addition to the main conceptual foundations that value-based performance measures share,?

Answer 275

some common operational elements can be identified.

Question 276

This includes the organization’s management, which can be thought of as a three-stage-process:

Answer 276

–gain understanding of value creation in each business

–transform the company to align it with the ultimate goal of shareholder value maximization

–communicate results internally and externally

Question 277

It is understood that value creation is the central theme of value-based management and shareholder value is created when?

Answer 277

future cash flows with a positive net present value exceed expectations.

Question 278

From a management perspective, the main focus is on?

Answer 278

value drivers which ultimately increase shareholder value.

Question 279

In many cases these drivers are thought of in ————————terms. All aspects and activities of the organization need to be brought in line with —————————————————–.

Answer 279

financial

shareholder value maximization

Question 280

After an initial analysis, phase actions must be untertaken to create and preserve?

Answer 280

shareholder value and allign the company with its overall goal.

Question 281

This is clearly the management component of the———————————————– process.

Answer 281

value-based management

Question 282

For the practical implementation of this process, several techniques such as —————————————————————————————————are used. In many cases, specific reward and compensation plans are also developed to
—————this process.

Answer 282

portfolio management and competitive advantage frameworks

back

Question 283

A traditional managerial bonus plan awards a target bonus for meeting expectations. These expectations can be linked to share price or any other metric. The size of the bonus to be earned by exceeding expectations is ?

Answer 283

capped.

Question 284

The cap controls costs, but it provides no?

Answer 284

incentive to improve performance above a certain level.

Question 285

Sub-par performance is punished by ?

Answer 285

re­­ducing the bonus with no further disincentive once the bonus bottoms out at zero.

Question 286

A value-­based bonus plan can also include?

Answer 286

a target bonus plus a fixed percentage of excess value added im­­provement (since value-based metrics are measured in currency and can be positive or negative).

Question 287

The fixed percentage component results in an uncapped bonus level on ?

Answer 287

the upside or the downside.

Question 288

Removal of the upside cap creates ?

Answer 288

an unlimited incentive for improvement.

Question 289

The removal of the downside cap could theoretically result in ?

Answer 289

a negative bonus, but the bonus bank eliminates that possibility.

Question 290

With a bonus bank, a portion of any bonus exceeding the target bonus is banked for?

Answer 290

payout in future years.

Question 291

Therefore, managers can still get a bonus in years when?

Answer 291

value added metrics decline more than expected, which lessens retention risk.

Question 292

For any given year, no bonus is paid if the bonus bank balance is negative due to ?

Answer 292

long-term decreases in value added performance.

Question 293

Although such a bonus model has advantages over traditional measures, it still has three major limitations:

Answer 293

==The bonus plan can backfire if the corporate or national culture spurns strong wealth incentives. Older managers near retirement may see strong wealth leverage as too risky.

==In highly cyclical industries, it is difficult to create strong wealth leverage while avoiding large negative bonus bank balances in downtimes. This can only be achieved by setting compensation above market levels which results in a high cost to shareholders.

==In start-up companies or emerging markets, EVA is not the best performance metric.

Question 294

Communication is:

Answer 294

the third and last step in value-based management.

While specific to various aspects of internal and external communication, good, clear communication is sort of a holistic approach which especially stresses the question of how everybody in the company can contribute to the overall goal of the organization.

Question 295

Comminication efforts outside the company need to be?

Answer 295

very well coordinated and are part of the value realization process.

Question 296

Good and clear communication to the————————————- is crucial.

Answer 296

financial markets

Question 297

In addition to these practical and more operational steps, value-based management is generally embedded in ?

Answer 297

an ethical framework for achievement in business.

As such, this management system balances individual values with economic values.

Question 298

Three notions of value according to value-based management are:

Answer 298

==a foundation of shared ethical values-starting with a belief in the intrinsic value of each person (each employee, customer, and supplier).

==success in the marketplace based on delivering maximum value (higher quality at lower prices) to the customer.

==rewards based on the value people contribute to the organization; as individuals and as a team, as employees and as owners.

Question 299

The ethical and material aspects of value can be realized in a business by?
creating structures of corporate governance and management based on shared organizational values,

Question 300

as expressed in a written set of:

Answer 300

-organizational core values (i.e. ethical principles which define the culture and clarify the social purposes of the organization);

-a code of ethics (i.e. a set of encouraged habits to guide individual behavior toward strengthening the organization’s culture and interpersonal harmony).

Question 301

Ideally these core values and codes of ethics are agreed upon by ?

Answer 301

every person in the organization and are subject to periodic review and improvement.

Question 302

These values serve as the ‘————————- for guiding corporate objectives, ———————, and other decisions.
They also provide a basis for judging —————————————.

Answer 302

compass’
policies

people’s behavior

Question 303

Another aspect is maximizing value for ?

Answer 303

the stakeholders and customers by increasing quality and\/or decreasing price.

Question 304

Within a value-based culture, everyone in the organization recognizes ‘service to the customer’ as?

Answer 304

a primary goal.

Question 305

This simple formula becomes the core strategic task for any business that desires to succeed in ?

Answer 305

the competitive marketplace.

Question 306

As mentioned, structuring the company’s compensation and reward system therefore enables each person in the organization to be?

This theory states that a person’s returns are based on performance and contribution, not charity.

Answer 306

rewarded for the value of their contributions and inputs.

Question 307

This is one of the fundamental aspects of
———————-. It reflects the ‘correct’ principle of ——————————- and is contained within the————————- theory of economic justice.

Answer 307

ownership

distributive justice

Kelso-Adler

Question 308

This theory states that a person’s returns are based on?

Answer 308

performance and contribution, not charity.

Question 309

Basic value-based management compensation and reward systems might include:

Answer 309

–monthly, bimonthly, or quarterly bonuses linked to each worker’s profit centre within the company

–annual, corporate-wide performance bonuses based on formulas tying each worker’s con­tributions to overall organizational profits

–a structured, profit-based program of shared ownership (i.e. annual ESOP contributions) supplemented by cash dividend payouts to reinforce ownership awareness

Question 310

Value based management is designed to ?

Answer 310

‘institutionalize’ shared responsibility and shared risks as well as shared rewards within the organization’s ongoing structures and processes.

Question 311

The key management areas affected by the value based management transformation process include:

Answer 311

1corporate values and vision

2leadership style and skills

3corporate governance

4‘open book’ management

5operations (policies and procedures)

6communications and information sharing

7training and education

8payment and rewards

9grievances and adjudication

10collective bargaining with labor unions

11employee shareholder education and participation

12future planning

Question 312

Experiences from a growing number of organizations indicate that?

Answer 312

the more people’s self-­interests are unified within a management system which is reflecting the principles of value-­based management, the greater customer and employee satisfaction will be.

Question 313

This can lead to?

Answer 313

a flow of increased cost savings, increased sales, and increased profits.

Question 314

Summary and Pros and Cons of the Economic Value Added Model

After broadening the idea of value-based management, we want to return to the economic value added (EVA) model at the end of this section by summarizing the main advantages and limitations of this concept.

Question 315

Considered alongside similar value-based measures metrics, the EVA metric can overcome some significant shortcomings of other approaches such as:

Answer 315

==Traditional income measures, including net income and earnings per share, can be easily manipulated and they do not account for the cost of equity.

==Market-based measures, including market value added (MVA), excess return, and future growth value (FGV) can only be calculated for publicly-traded entities.

==Cash flow measures, including cash flow from operations (CFO) and cash flow return on investment (CFROI) include neither the cost of equity nor the cost of debt.

Question 316

Additionally, calculating economic value added for private entities or for divisions within companies can also be used as?

Answer 316

a motivational tool on several levels of hierarchy within an organi­zation.

Question 317

Traditional managers understand that their organizations need to control ———————————————————————-. However, many organizations must compete in the capital markets by keeping their cost of capital ——–.

Answer 317

operating costs and succeed in commercial markets

low

Question 318

Paying managers for performance is a ———————————— practice, since the ——————————————-assign value on a forward-looking basis. Therefore, organizations which pay their managers for past performance may
———————–pay to undermine value creation.

Answer 318

backward-looking

capital markets

unwittingly

Question 319

An organization willing to implement EVA-related performance measurement throughout its business has to?

Answer 319

recognize the importance of all affected employees understanding the common goal as well as how their actions contribute to meeting it.

Question 320

In this respect, the EVAs’ popularity corresponds with ?

Answer 320

the trend of ‘total quality management’,

which was established in the 1980s.

Question 321

Like quality, value is every employee’s responsibility. Therefore, management and employee training programs are?

Answer 321

crucial components of any EVA plan.

Question 322

The shareholder value approach has—————–in importance over the last years. Academics and practitioners, mention several benefits of the —————————— in the context of shareholder value management. As a ————————————measure, it allows for an annual measurement of ——————————————————————————- performance.

Answer 322

increased

EVA concept
single-period

actual, non-estimated or forecasted value-created

Question 323

The EVA corresponds more closely to?

Answer 323

economic profit than accounting measures do, and as a result, it is consistent with shareholder interests.

Question 324

Claims have also been made that the introduction of EVA measures can drive behavioral change by?

Answer 324

providing an incentive to promote shareholder interests as the main objective.

Question 325

Going back to the observation that traditional performance measures do not correlate with?

Answer 325

stock prices, several studies have attempted to empirically prove the relationship between EVA performance measures and stock performance (i.e. shareholder value increase).

Question 326

While some studies find support for this hypothesis, others have contradicted this conclusion, pointing out that EVA does not ————————————————–. As such, there are indicators that EVA does not overcome all —————————————————- measures.

Answer 326

influence stock market returns

limitations of traditional performance

Question 327

Moreover, it can be said that EVA as a single period measure does not address the problem of?

Answer 327

the time period over which profits are to be maximized and it does not provide a strong enough incentive to avoid ‘short-termism’.

Question 328

An additional critique stems from the fact that EVA is still tied to accounting derived figures such as?

Answer 328

the capital charge being based on the economic book value and thus strategic and market based aspects are neglected.

Question 329

A final drawback of EVA is the ——————-focus of the model. It fails to consider the industry and —————————————– in which each organization operates and it does not give clear direction on how businesses can create sustainable value from a strategic ————————————-.

Answer 329

financial

competitive context

long-term view

Question 330

We will return later to this aspect and explore how other performance measures, in particular the balanced?

Answer 330

scorecard, tackles these issues.

Question 331

Additionally, it is worth mentioning that implementing EVA is a ———————– and very much ———————– process. Its practical application goes beyond pure account and
————– measures.

Answer 331

complex

company-specific

financial

Question 332

Facets of Economic Value Added-Based Management

image

Question 333

Companies are more likely to benefit from economic value added (EVA) if they adopt the following characteristics:

Answer 333

==The corporate structure consists of relatively autonomous business units, rather than one large unit or a matrix organization with substantially shared resources.

==Strong managerial wealth incentives are tied to business unit performance, rather than to corporate-wide goals (as with stock or stock options) or the discretion of the compensation committee.

==The CEO is an enthusiastic advocate. They go along with something that they fully understand and support. Economic value added implementation should begin at the top.

==Business unit heads are personally involved with the well-being of the organization and are thus motivated by long-term incentives.

Question 334

Ultimately, it can be said that EVA-based management is a?

Answer 334

customer-focused system built upon shared principles and core values.

Question 335

It is designed to?

Answer 335

instill an ownership culture in an organization.

Question 336

Following on from the market-oriented theory of economic justice, this management system is?

Answer 336

triggered by ‘authentic leaders’ who actively seek to empower others; it is developed and sustained from the bottom up.

Question 337

Furthermore, value-based management offers employees an opportunity to participate as?

Answer 337

first-class shareholders in the company’s equity growth.

Question 338

This is achieved by monthly and annual profits on?

Answer 338

a profit centre basis.

Question 339

Experience has shown that the encouragement of people, reinforced by?

Answer 339

a value based management culture, leads to an empowered workforce which makes better decisions, disciplines its own behavior, and works together more effectively.

Question 340

Since each person contributes and therefore carries risks and shares as an owner as well as?

Answer 340

a worker, the value-based management helps unite everyone’s self-interest around the organization’s bottom-line and corporate values.

Question 341

A well-designed EVA-based management system can sharpen ?

Answer 341

a new market philosophy around a set of universal business principles.

Question 342

Through a participatory, company-wide process, the foundation is laid for ?

Answer 342

an on-going ownership sharing culture within an organization.

Question 343

Such culture typically incorporates an?

Answer 343

employee stock ownership plan, individual and team performance feedback (i.e. formula-based cash profit sharing), ownership education, and sharing of financial information.

Question 344

Furthermore, it contributes to ?

Answer 344

structured participatory management and governance.

Question 345

EVA-based management builds checks-and-balances in the governance and accountability system to allow?

Answer 345

executives flexibility to make traditional executive decisions, while avoiding unworkable ‘management by committee’.

Question 346

EVA is one of the basic factors of?

Answer 346

value-based management.

Question 347

Value-based management goes beyond quantitative approaches and can be seen as?

Answer 347

an ethical framework for succeeding in business.

Question 348

Value-based management is also related to?

Answer 348

the cash value added (CVA) metric as well as the cash flow return on investment (CFROI) metric.