Financial/ Non Financial Measures of Performance

Question 1

Acid Test - Quick Ratio

Answer 1

The acid test ratio is the ratio of quick current assets to current liabilities.

Cash= Mktble Securities / Current Liabilities

Question 2

Appraisal Costs

Answer 2

Appraisal costs are costs associated with quality control and include testing and inspection.

Question 3

BSC - Balanced Scorecard

Answer 3

Four Perspectives

• Financial - Specific measures of financial performance
• Customer - Performance related to targeted customer and market segments
• Internal Business Processes - Performance of the internal operations that create value (i.e., new product development, production, distribution, and after-the-sale customer service)
• Learning , Invovation and growth -—Performance characteristics of the company’s personnel and abilities to adapt and respond to change (e.g., employee skills, employee training and certification, employee morale, and employee empowerment)

Question 4

BSC - Balanced Scorecard

Answer 4

The primary purpose of the balanced scorecard is to measure performance.

Question 5

Economic Value Added

Answer 5

EVA is often used for incentive compensation and investor relations.

This is likely due to the emphasis on the use of income (first part of the equation) exceeding the cost of capital (second part of the equation) in measuring wealth creation.

Question 6

Economic Value Added

Answer 6

EVA suffers from its origins in accrual-based NOPAT and the difficulty in defining the nature of economic profit (i.e., economic profit is not cash-based, but it is often adjusted such that it is not strictly accrual-based either).

Question 7

Economic Value Added

Answer 7

EVA = NOPAT − WACC (Total Assets − Current Liabilities)

NOPAT = net operating profit after tax;

WACC = weighted average cost of capital

Question 8

0Economic Value Added

Answer 8

• EVA is an economic profit (EP) metric and a specific form of residual income. Like other forms of residual income, EVA is stated in dollars.
• Economic value-added is equal to net operating profit after taxes minus the cost of capital.

Question 9

Expected Value

Answer 9

It is not always possible to make decisions under conditions of total certainty

Decision makers must have a method of determining the best estimate or course of action where uncertainty exists.

One method is probability analysis. Probabilities are used to calculate the expected value of each action. The expected value of an action is the weighted-average of the payoffs for that action, where the weights are the probabilities of the various mutually exclusive events that may occur.

Question 10

External Failure Costs

Answer 10

External failure costs are incurred for products that do not meet requirements of the customer and have been shipped to the customer.

Question 11

Gross Margin

Answer 11

Gross Margin = Revenue - Cof GS/ Sales

This is a conventional metric that reflects profitability prior to the recognition of period expenses (i.e., selling and general/administrative expenses)

Gross margin is equal to gross profit divided by sales. Gross profit is equal to sales minus cost of goods sold.

Question 12

Internal Business Cycle

Answer 12

Internal Business Processes—Percentage of production downtime, delivery cycle time (time between order and delivery), manufacturing cycle time/throughput (the time required to turn raw materials into completed products), manufacturing cycle efficiency (ratio of time required for nonvalue-adding activities to the total manufacturing cycle time), standard cost variances, product defect rate, amount of scrap and rework

Cycle time would be an important measure for the business processes perspective. It measures the time it takes to produce a product.

Question 13

Internal Business Processes

Answer 13

Internal Business Processes - Performance of the internal operations that create value (i.e., new product development, production, distribution, and after-the-sale customer service)

The number of defective units would appear in the internal business processes perspective which includes measures of cost, quality, and time performance.

Question 14

Internal Failure Costs

Answer 14

Internal failures occur when substandard products are produced but discovered before shipment to the customer.

Question 15

Pareto Chart

Answer 15

A bar graph that ranks causes of process variations by the degree of impact on quality.

The Pareto chart is a specialized version of a histogram that ranks the categories in the chart from most frequent to least frequent. A related concept, the Pareto Principle, states that 80% of the problems come from 20% of the causes. The Pareto Principle states: “Not all of the causes of a particular phenomenon occur with the same frequency or with the same impact.”

Question 16

Prevention Costs

Answer 16

Prevention costs involve any quality activity designed to do the job right the first time.

Question 17

Quick Ratio or Acid Test

Answer 17

Quick Ratio or Acid Test Ratio = (Current Assets − Inventory) / Current Liabilities

This metric removes inventory since inventory is often less liquid than other current assets, such as short‐term investments and receivables. Also, inventory may be valued at liquidation value only when a company is in distress making it less appropriate for meeting current obligations.

Question 18

Residual Income

Answer 18

Residual income is equal to net operating profit minus the cost of capital based on average capital invested in the division.

Question 19

ROI

Answer 19

ROI equals net operating profit divided by sales times sales divided by total assets.

These two ratios comprise the simple DuPont equation

Alternatively, The return on investment would be computed by dividing net operating income by average invested capital

ROI is highly related to stock price and, therefore, shareholder value.

Question 20

Six Sigma

Answer 20

Six Sigma: A statistical measure expressing how close a product comes to its quality goal. One-sigma means 68% of products are acceptable; three-sigma means 99.7% of products are acceptable. Six-sigma is 99.999997% perfect: 3.4 defects per million parts

Question 21

Strategy Initiative

Answer 21

A strategy initiative in the balanced scorecard framework is a key action program required to achieve strategic objectives.

Question 22

Cash Flow Return on Investment CFROI

Answer 22

• CFROI is often used for incentive compensation, valuation, and capital budgeting. This is likely due to the emphasis on cash flow and the wide acceptance of cash flow for these purposes.
• CFROI suffers from the weaknesses inherent in rate-based metrics (i.e., diluted hurdle rate problem and the potential difficulty in applying rates to analysis where negative cash flows are involved

Question 23

Value-Based Management (VBM)

Answer 23

Refers to relatively new financial metrics and processes for using them.

The most popular VBM metrics and their creators include economic value added (EVA)

Question 24

Free Cash Flow

Answer 24

Free cash flow is equal to net operating profit after taxes plus noncash expenses less capital expenditures and the change in working capital requirements.

Question 25

Cross-Sectional Analysis

Answer 25

Cross-sectional analysis involves comparing results and ratios to those of other firms in the same industry

Question 26

Generic Benchmarking

Answer 26

Generic benchmarking involves benchmarking to the best practices regardless of the industry.

Question 27

Free Cash Flow

Answer 27

Free cash flow equals NOPAT plus depreciation minus change in working capital minus capital expenditures.

NOPAT = net operating profit after tax;

Question 28

Strategy Map

Answer 28

Diagrams of the cause-and-effect relationships between strategic objectives.

Question 29

Backflush Costing

Answer 29

Typical product-costing systems synchronize the recording of accounting-system entries with the physical sequence of purchases and production.

The alternative (which is normally used in high-speed automated environments) of delaying journal entries until after the physical sequences have occurred is referred to as backflush costing

Question 30

Benchmarking

Answer 30

Compare and contrast financial information to published information reflecting optimal amounts

Question 31

Kaizen

Answer 31

Kaizen is the Japanese art of continuous improvement.

It underlies the total quality management and JIT business techniques.

Question 32

Six-Sigma

Answer 32

Six-sigma is a statistical measure expressing how close a product comes to its quality goal. Six-sigma is 3.4 defects per million parts.

Question 33

Lean Manufacturing

Answer 33

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

Question 34

Theory of Constraints

Answer 34

The theory of constraints is a method to maximize operating income when faced with some bottleneck operations.

Question 35

Internal Failure Cost

Answer 35

An internal failure cost is a cost incurred when substandard products are produced but discovered before shipping to the customer.

Reworking defective parts is an example of an internal failure.

Question 36

Appraisal Cost

Answer 36

Cost of inspecting products on the production line by quality inspectors.

Question 37

DuPont ROI Analysis

Answer 37

the Dupont ROI analysis:

ROI = Return on sales multiplied by the capital employed turnover rate

(which can be measured as total asset turnover).

Question 38

Multiple Regression Analysis

Answer 38

Regression analysis determines the functional relationship between variables and provides a measure of probable error.

Multiple regression analysis involves the use of two or more independent variables (such as the number of shipments and the weight of materials handled) to predict one dependent variable (inventory warehouse costs).