E Theory 2 Flashcards
(126 cards)
1
Q
Mission in performance hierarchy?
A
The main reason for the existence of the organisation
2
Q
Corporate objectives in performance hierarchy?
A
More concrete objectives, stating what the mission means in practical terms to the primary stakeholder groups
3
Q
Subsidiary objectives in performance hierarchy?
A
Other objectives of the organisation may relate to various stakeholder groups
4
Q
Unit objectives in performance hierarchy?
A
These are objectives for the operating departments (units) of the organisation
5
Q
What does ROCE show?
A
The return generated on the long-term capital invested in the company
6
Q
Service industry vs manufacturing industry for ROCE?
A
Service industries, for example, require less capital than manufacturing industries and will show a greater return on capital employed for each dollar of profit
7
Q
Increase ROCE without making improvements (policies)
A
The use of different accounting policies may affect profits and capital employed
8
Q
Increase ROCE without making improvements (investment)
A
Delaying investment in new plant and machinery or reducing investment in intangible assets. As the existing non-current assets depreciate, their carrying amount (net book value) falls, reducing the capital employed and improving ROCE
9
Q
Falling gross profit margin (selling price)
A
Either the selling price at which the company sells its goods is declining
10
Q
Falling gross profit margin (making or buying)
A
The cost of making or buying those goods is increasing, but those increases cannot be passed on to customers.
11
Q
When a gross profit margin is in a prolonged decline?
A
Suggests that the company’s products or services are losing popularity, which raises concerns for the viability of the business
12
Q
How can gross profit margins be improved (products)
A
Introducing new products that are popular with customers
13
Q
How can gross profit margins be improved (target)
A
Using target costing to reduce the cost of sales
14
Q
An incorrect way to improve gross profit margin (reclassify)
A
Reclassifying direct expenses as administrative would increase the gross profit margin but not improve overall profitability
15
Q
What does operating profit margin reflect (products)
A
The underlying popularity of the company’s products and services (this is also reflected in the gross margin).
16
Q
What does operating profit margin reflect (administrative)
A
The amount of control the company has over administrative-type expenses
17
Q
How to improve operating profit margin (products)
A
Introduce new products that are popular with customers
18
Q
How to improve operating profit margin (costing)
A
Use target costing to reduce the cost of sales
19
Q
How to improve operating profit margin (sales volume)
A
Increasing sales volume should increase operating profit margins if a high portion of the company’s costs are fixed (e.g. in a training company)
20
Q
How to improve operating profit margin (administrative)
A
Better control over administrative expenses (e.g. salaries)
21
Q
What does asset turnover ratio indicate?
A
Whether or not the capital invested is appropriate, given the value of sales revenue
22
Q
How can asset turnover ratio be improved (NCA)
A
Selling non-current assets that are surplus to requirement
23
Q
How can asset turnover ratio be improved (impairment)
A
Recognising impairments and writing down the value of the assets
24
Q
How can asset turnover ratio be improved (management)
A
Improving working capital management, for example by collecting receivables more quickly
25
Causes of a decline in ROCE (ratio)
A decline in the asset turnover ratio
26
Causes of a decline in ROCE (margin)
A fall in the profit margin
27
What do liquidity ratios measure?
The ability of the organisation to meet its liabilities as they become due
28
What is the ultimate measure of liquidity?
Operating cash flows. If a company generates positive operating cash flows sufficient to replace non-current assets, it is less likely to experience liquidity problems
29
What is meant by the current ratio?
Purpose of the current ratio is to measure the adequacy of current assets to meet current liabilities
30
What does a ratio less than 1 mean for the current ratio?
Current liabilities exceed current assets
31
What is the inventory holding period?
Measure the amount of time inventory is held before it is sold, measured in days
32
When the inventory holding period is shorter?
The lower the holding costs of inventory and the faster inventory can be converted into cash
33
What is the receivables collection period?
Measure the amount of time receivables are held before they are collected, measured in days
34
The shorter the receivables collection period?
The lower the financing costs of receivables, and the faster receivables can be converted into cash
35
What is the payables payment period?
Measure the amount of time payables are held before it is they are paid, measured in days
36
How can payables be used?
As a form of interest-free financing
37
When the payables payment period is longer
The lower the financing cost
38
What does the quick ratio measure?
Immediate liquidity (by eliminating the least liquid asset, inventory, from current assets)
39
A declining quick ratio may indicate?
An inability to meet its liabilities as they come due. This could result from insufficient cash flows to pay its suppliers on time or a cash shortage due to investments in non-current assets
40
How to improve liquidity ratios (finance)
Using long-term finance (loans and equity) to finance acquisitions of non-current assets
41
How to improve liquidity ratios (positive)
Generating positive cash flows to repay short-term liabilities on time
42
What does gearing measure?
The portion of a company's finance provided by debt
43
Why do providers of debt require a lower return than providers of equity finance?
They face less risk, as they receive preferential repayment in the event of default
44
Issue with companies with too much debt (gearing)
Increases the risk of being unable to repay the debt's interest and principal
45
When is the gearing ratio useful?
If the gearing of the organisation is compared with industry averages or with other companies in the same business area to determine whether or not the gearing is too high
46
Which companies allow for high gearing?
Industries with stable profits
47
Risk with high gearing in companies with fluctuating profits?
A fall in profits may mean the company cannot repay interest on its loans
48
What may an increase in gearing overtime reflect?
Changes in the level of debt deemed acceptable to the finance director
49
What is meant by interest cover?
How much the return on debt (interest) is covered by profit
50
How do lenders use interest cover?
Lenders use this measure to determine the vulnerability (sensitivity) of interest payments to a fall in profit
51
Inherent weakness of financial performance indicators (cost reduction)
FPIs may lead to excessive focus on cost reduction. Short-term cost reductions may be achieved at the expense of long-term performance due to the effect on staff morale, quality and other factors
52
What do FPIs ignore?
Customer satisfaction, quality
53
Inherent weakness of financial performance indicators (accounting)
Using different accounting policies and "window dressing" to make the performance look better
54
What is short-termism
Managers may take a short-term view and concentrate on achieving the next set of financial targets, ignoring the longer term to achieve better bonuses
55
Short-termism reasons (bonus)
Receiving a bonus now seems much more attractive than earning it in the future
56
Short-termism reasons (relevancy)
They may view that future financial performance is irrelevant to them, as they will be working elsewhere by then
57
Short-termism reasons (shareholders)
Shareholders may take a short-term view of performance and will be disappointed if the targets of the current period are not met
58
Actions to improve financial performance in the current will harm business in long-term (invest)
Failing to invest in worthwhile projects (i.e. that would generate profits over several years) as this may erduce short-term projects
59
Actions to improve financial performance in the current will harm business in long-term (headcount)
Reducing headcount, which may lead to a reduction in the quality of customer service
60
Actions to improve financial performance in the current will harm business in long-term (expenditure)
Cutting expenditure activities that would lead to better quality of a product. In the long term, this may lead to losing customers and revenue
61
How can NFPIs mitigate short-termism (quality)
Measures of the quality of a product or a service should ensure managers do not cut back on these
62
How can NFPIs mitigate short-termism (satisfaction)
Measures relating to staff satisfaction (e.g. staff turnover) should reduce cutbacks in staff-related expenditure
63
What is a critical success factors?
An area where an organisation must perform well if it is to succeed
64
What is a KPI?
A quantifiable metric that measures the achievement of a goal or objective
65
What is specific characteristic in KPI?
Measure profitability rather than “financial performance”, a term which could mean different things to different people
66
What is measurable characteristic in KPI?
Number of customer complaints rather than “level of customer satisfaction”
67
What is relevant characteristic in KPI?
They measure achievement of a critical success factor
68
Advantage of NFPI (reports)
Usually easier to calculate than financial reports, they can be provided much more quickly
69
Advantage of NFPI (organisations)
More flexible as organisations can come up with any measures appropriate to their objectives
70
Advantage of NFPI (financial policies)
Less affected by changes in financial policies than financial measures
71
What is meant by quality control?
Focuses on measuring the quality of the products and comparing this against a predetermined standard
72
What is meant by quality assurance?
Might include redesigning processes, using better-quality materials and "quality meetings" during which staff members suggest ways to improve quality
73
How to improve customer service (staff)
Training to ensure staff understand the importance of customer service.
74
How to improve customer service (incentive)
Incentives to staff to reward improvements
75
Most critical qualitative areas of performance?
Quality of product or service
Customer satisfaction
Delivery
After-sales service
76
Difficulties in setting targets for qualitative areas (staff behaviour)
Staff will aim to achieve the targets but perhaps not in the expected manner
77
Difficulties in setting targets for qualitative areas (measure)
Many qualitative factors cannot be measured. For example, how do you measure "friendliness of staff"?
78
What are not-for-profit organisations?
Schools, hospitals, charities, NGOs
79
Why are not for profit organisations easy to measure? (quantify)
They are challenging to quantify. How can a hospital's aim "to improve health in the area" be measured?
80
Why are not for profit organisations easy to measure? (conflicting)
Many non-profit bodies have multiple stakeholders, each with potentially conflicting objectives
81
Why are not for profit organisations easy to measure? (primary)
There may be no clear primary objective (in contrast with commercial companies with profit maximisation as their primary objective to which all other goals are assessed)
82
What must management do with stakeholders?
Management must rank its stakeholders and prioritise goals accordingly
83
What are charities (groups)
They exist solely to benefit defined groups in society
84
What are charities (activities)
Their activities are restricted or limited by a regulator
85
What are charities (financial)
Their financial viability relies heavily on voluntary (unpaid) managers and workers
86
What is the main objective of NFP organisations?
Usually non-financial, so it does not make sense to judge their performance primarily using financial measures
87
Why is setting qualitative targets hard for NFPs? (identify)
Identifying measures for qualitative areas can be challenging enough, even before consideration of setting the target
88
Why is setting qualitative targets hard for NFPs? (difficulty)
Determining the appropriate level of difficulty for the target is difficult. A target that is too difficult may demotivate
89
Why is setting qualitative targets hard for NFPs? (environment)
Meaningful targets need to take into account differences in the external environment. For example, a school's demographics may significantly influence exam results
90
Issue with reducing costs for NFP sector?
Cost reduction may conflict with some non-financial objectives if the quality of the service provided to stakeholders is adversely affected
91
Objective for employees in context of an organisation's performance?
Satisfactory remuneration
Good working conditions
92
Objective for customers in context of an organisation's performance?
Good quality products
93
Objective for suppliers in context of an organisation's performance?
Long-term relationships
Pay within agreed terms
94
Objective for general public in context of an organisation's performance?
Employment opportunities
Economic effect on the region
Environmental impact
95
Objective for government in context of an organisation's performance?
Compliance with law (e.g. environment)
96
What should performance evaluation measure?
Actual results against revised budgets to account for factors not originally considered
97
What is meant by sustainability?
Meeting the needs of the present without compromising the ability of future generations to meet their own needs.
98
Ways in which poor environmental behaviour damages an organisations?
Fines, reputational damage, inability to secure finance
99
Transfer price?
The price at which one division transfers goods or services to another division within a company or from one subsidiary to another within a group
100
What does transfer pricing require for management accounts?
Transfer pricing system is required to prepare management accounts for the two divisions, which reflect the work performed by both divisions.
101
Transfer pricing policy needed when (decentralised)
An organisation has been decentralised into divisions
102
Transfer pricing policy needed when (inter-division)
Inter-division trading of goods or services occurs
103
How must transfers between divisions be recorded?
In monetary terms as revenue for supplying divisions and costs for receiving divisions
104
Objectives of transfer pricing?
Goal Congruence
Divisional Autonomy
Divisional Performance Evaluation
105
What should transfer prices encourage for divisional managers?
Transfer prices should encourage divisional managers to make decisions in the best interests of the organisation as a whole
106
What should a transfer pricing system help eliminate?
Head office telling divisions what to do. Also, autonomy should improve the motivation of divisional managers
107
How should transfer prices be fair?
Allow an objective assessment of divisional performance. The transfer price used should permit each division to make a profit
108
What is the opportunity cost zero from the selling division's perspective?
No external market or external market but spare capacity
No production constraints
109
When to use the opportunity cost from the selling division's perspective?
An external market exists
The supplying division operates at full capacity
110
When does an opportunity cost arise?
When an internal sale sacrifices an external sale
111
When is the maximum transfer price acceptable to the buying division
Lower of:
The external market price (if an external market exists)
The net revenue of the buying division
112
What is the net revenue of the buying division?
The ultimate selling price of the goods/services sold by the buying division, less the cost of those goods incurred by the buying division
113
When is a market price used? (transfer pricing)
If buying and selling divisions can buy/sell externally at market price
114
Advantage of market price method (congruence) (transfer pricing)
Optimal for goal congruence if the selling division is at full capacity
115
Advantage of market price method (efficiency) (transfer pricing)
Encourages efficiency − the supplying division must compete with external competition
116
Disadvantage of market price method (competitive) (transfer pricing)
Only possible if a perfectly competitive external market exists
117
Disadvantage of market price method (fluctuate) (transfer pricing)
Market prices may fluctuate
118
Benefits of full cost plus method (calculate) (transfer pricing)
Easy to calculate if a standard costing system exists.
119
Benefits of full cost plus method (selling) (transfer pricing)
Covers all costs of the selling division
120
Disadvantage of full cost plus method (fixed costs) (transfer pricing)
The fixed costs of the selling division become the variable costs of the buying division − which may lead to dysfunctional decisions
121
Disadvantage of full cost plus method (spare capacity) (transfer pricing)
If the selling division has spare capacity, it may lead to dysfunctional decisions
122
Advantage of marginal cost (congruence)
Optimal for goal congruence when: The selling division has spare capacity; or
no external market exists
123
Disadvantage of marginal cost (calculate)
It may be difficult to calculate
124
Example of incongruent goal behaviour from seliing division and buying division?
The selling division may set a price too high for the buying division, leading the buying division to buy externally or forgo production
125
When is dual pricing used?
In situations where no transfer price would be acceptable to both the buying division and the selling division.
126
Why use dual pricing?
Head office uses the dual pricing system to encourage them as head office may want to trade for non-financial reasons
