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Leah's Notecards Flashcards

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1
Q

The Multiplier–the change in equilibrium GDP

A

Where MPS + MPC = 1

Change in Equilibrium GDP = 1/MPS x change in spending

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2
Q

Expenditure Approach (Input Approach) Calculation of GDP

A

Personal Consumption Expenditures
+ Gross Private Domestic Fixed Inv. (Bus. & Res.)
+ Gov’t Purchases (Federal, State & Local)
+ Net Exports (may be a + or - number)
+ Changes in Bus. Inventories (may be a + or - number)
= Gross Domestic Product

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3
Q

Net Domestic Product (NDP)

A

Gross Domestic Product
- Depreciation (also called Capital Cost Allowance)
= Net Domestic Product

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4
Q

Income Approach (Output Approach)

Calculation of GDP

A

Compensation to Employees
+ Corporate Profits
+ Net Interest
+ Proprietor’s Income
+ Rental Inc. of Persons
= National Income
+ Indirect Taxes
- Other, Incl. Statutory Discrepancy
= Net National Product
+ Consumption of Fixed Capital
= Gross National Product
+ Payments of Factor Inc. to Other Countries
- Receipts of Labor Inc. from Other Countries
= Gross Domestic Product

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5
Q

Effect of Price Changes on Various Types of Goods
aka

The Relationship between Price Elasticity and Total Revenue

A

If Elastic Demand, E > 1
Price INCREASE, then Revenue DECREASES
Price DECREASE, then Revenue INCREASES

If Inelastic Demand, E<1
Price INCREASE, then Revenue INCREASES
Price DECREASE, then Revenue DECREASES

If Unitary Demand, E = 1
Price INCREASE, no change in Revenue
Price DECREASE, no change in Revenue

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6
Q

Movement along Demand & Supply Curves

A

Demand
Right = More Demand (Up & Right)
Left = Less Demand (Down & Left)
**Inverse Curve

Supply
Left = Less Supply (Up & Left)
Right = More Supply (Down & Right)

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7
Q

Factors Affecting Demand for a Product other than it’s Price (7)

A
  1. Price of Substitute Goods - Direct Effect
  2. Price of Complement Goods - Inverse Effect
  3. Expectations of Price Increase - Direct Effect
  4. Consumer Income & Wealth - Direct Effect
  5. Consumer Tastes - Indeterminate Effect
  6. Size of Market - Direct Effect
  7. Group Boycott - Inverse Effect
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8
Q

Elasticity of Demand

Elasticity of Supply

A

Elasticity of Demand - the sensitivity of demand to a change in price

Elasticity of Supply - the percent change in quantity supplied of a product resulting from a change in product price

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9
Q

Cross-Elasticity of Demand

A

Measures the change in demand for a good when the price of a related or competing product is changed

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10
Q

A change in a market price of a product results in a _____ alont the existing supply curve.

A supply curve _____ occurs when supply variables other than price change.

A

Movement

Shift

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11
Q

Factors Affecting the Supply of a Product other than it’s Price (6)

A
  1. ​Number of Products - Direct Effect
  2. Change in Prod. Costs or Tech. Advances - Inverse Effect
    1. ​Cost goes up, Supply goes down
  3. ​Government Subsidies - Direct Effect
  4. Government Price Control - Limited amt supplied
  5. Price of other goods - Inverse Effect
  6. Price Expectations - Direct Effect
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12
Q

Price Ceiling

Price Floor

A

Price Ceiling - max price that can be charged for a good. If set below equilibrium = shortage

Price Floor - minimum price that can be charged for a good. If set above equilibrium = surplus

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13
Q

Market Equilibrium

A

Price at which all goods offered for sale will be sold. Price at which demand and supply intersect.

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14
Q

Law of Diminishing Marginal Utility

A
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15
Q

What are two ways to estimate expected returns?

A

Arithmetic Avg. Return: Add historical returns for a number of periods & divide by that number of periods

Geometric Avg. Return: Compound annual return earned by investor

A = ST

G = LT

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16
Q
  1. The level of production actually occuring for the period
  2. The production level expected to be achieved over a number of periods or seasons under normal circumstances
A
  1. Actual Activity Level
  2. Normal Activity Level
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17
Q

____ encompasses both ____ (assigment of direct costs to a cost object) and ____ (assignment of indirect costs to the cost object) ____ the item (product, department, process, etc) for which cost is being determined.

A

Cost Assignment

Cost Tracing

Cost Allocation

Cost Object

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18
Q

Normally includes indirect manufacturing labor costs, supplies cost, & other production facility costs such as plant depreciation, taxes, etc. It is composed of all manufacturing costs that are not direct materials or direct manufacturing labor.

A

Factory (manufacturing) overhead

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19
Q
  1. Easily traceable to specific units of production & include direct manufacturing labor & direct materials
  2. Those easily traced to a specific business segment
  3. Not easily traceable to specific segments & include factory OH
A
  1. Prime Cost
  2. Direct Cost
  3. Indirect Cost
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20
Q

Cannot be associated (or matched) with manufacturing goods. Become expenses when incurred.

A

Period Costs

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21
Q

Costs that can be associated with the production of specific goods. Attached to a physical unit and becomes an expense in the period in which the unit to which they attach is sold. Normally includes DM, DL & OH

A

Product Costs

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22
Q

A costing system that omits recording some or all of the journal entries to track the purchase & production of goods. Goods are costed after they have been completed.

A

Backflush Costing

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23
Q

Determined from industrial engineering studies that examine how activities are performed and if/how performance can be improved

A

Engineered Costs

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24
Q

The sequence of business functions in which value is added to a firm’s products or services. This sequence includes research & development, product design, manufacturing, marketing, distribution, & customer service.

A

Value Chain

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25
The cost of activities that cannot be eliminated without the customer perceiving a decline in product quality or performance.
Value-Added Cost
26
The cost of activities that can be eliminated without the customer perceiving a decline in product quality or performance.
Non-Value-Added Costs
27
Groupings of related costs accumulated together to be allocated to a product or some other cost object.
Cost Pools
28
A factor that causes a cost to be incurred. May be volume-related & transaction-related.
Cost Driver
29
A cost system that focuses on activites, determines their costs & then uses appropriate cost drivers to trace costs to the products based on the activities.
Activity-based Costing (ABC)
30
A system for allocating costs to homogeneous units of a mass-produced product.
Process Costing
31
A system for allocating costs to groups of unique products made to consumer specifications.
Job-Order Costing
32
Review Performance Measures in the Balance Scorecard (pg. 269-270) Prevention, Appraisal, Internal Failure, External Failure (pg. 281)
33
4 Types of Benchmarking
* _Internal Benchmarking:_ Compares similar operations within different units of the same organization * _Competitive Benchmarking:_ Targets processes & methods used by an organization's direct competitors * _Functional or Industry Benchmarking:_ Compares similar functions within the same broad industry * _Generic Benchmarking:_ Compares processes that are independent of industry
34
5 Functions of Financial Management
* ​Financing Function * Capital Budgeting Function * Financial Management Function * Corporate Governance Function * Risk-Management Function
35
Cash Conversion Cycle = ?
Inventory Conversion Period + Receivables Conversion Period - Payables Deferral Period Inverse Relationship with company profitability
36
Inventory Conversion Period = ?
Average Inventory/COGS per day or Sales per day Average time required to convert materials into finished goods and sell them.
37
Characteristics of the Balance Scorecard (5)
* Stratey - focused * Balanced * Includes both financial & non-financial measures * Cause-and-effect linkages * Unique to the strategy
38
Components of the Balance Scorecard (5)
1. **_Strategic Objectives:_** stmt of what strategy must achieve and what is critical to it's success 2. **_Performance Measures:_** describe how success in achieving the strategy will be measured and tracked 3. **_Baseline Performance:_** the current level of performance for the performance measure 4. **_Targets:_** level of performance or rate of improvement needed in performance measure 5. **_Strategic Initiatives:_** Key action programs required to achieve strategic objectives
39
Balance Scorecard Definition 4 Primary Perspectives
A strategic performance measurement and management framework for implementing strategy by translating an organization's mission and strategy into a set of performance measures. 4 Primary Perspectives: Financial, Customer, Internal Business Processes, and Learning & Growth
40
Price/Earnings Ratio Book Value Per Share Market/Book Ratio Debt to Total Assets Debt to Equity Ratio Times Interest Earned
Stock Price per Share/Basic EPS Common Stock Equity/# of shares of Common Stock outstanding Market Value per Share of CS/Book Value per share of CS Total Liabilities/Total Assets Total Liabilities/Total Equity Earnings before Interest & Taxes/Interest Expense
41
Current Ratio Quick Ratio Receivables Turnover Average Collection Period Inventory Turnover of Days' Sales in Inventory Total Asset Turnover
Current Assets/Current Liabilities Cash + ARnet + Mkt Securities/CL Net Credit Sales/Average AR 365/AR Turnover COGS/Average Inventory 365/Inventory Turnover Sales/Average Total Assets
42
Gross Margin Profit Margin Operating Profit Margin ROA ROE
Gross Profit/Net Sales Net Income after Interest & Taxes/Net sales Operating Profit (EBIT)/Net Sales Net income after Interest & Taxes/Average Total Assets Net Income after Interest & Taxes/Average Common SHE
43
Profitability Ratios (6) Asset Utilization Ratios (6) Liquidity Ratios (2) Debt Utilization Ratios (3) Market Ratios (2)
**_Profitability Ratios_**** _Liquidity Ratios_** Gross Margin Current Ratio Operating Profit Margin Quick or Acid Ratio ROA ROE **_Debt Utilization Ratios_** Dividend Payout Ratio Debt to Total Assets Profit Margin Debt to Equity Times Interest Earned **_Asset Utilization Ratios_**** _Market Ratios_** Receivable Turnover Price/Earnings Ratio Average Collection Period Market/Book Ratio Inventory Turnover Fixed Asset Turnover Total Asset Turnover # Days Sales Inventory
44
Free Cash Flow = ?
NOPAT + Dep/Amort Exp - Capital Expenditures - Change in Net Working Capital
45
EVA = ?
NOPAT - (i x [TA-CL]) i = WACC
46
Residual Income = ? Return on Investment = ? Elasticity of Supply = ? Income Elasticity of Demand = ?
***Residual Income*** = Net Income - Interest on Investment where interest = required rate of return x invested capital ***Return on Investment (ROI)*** = Net Income/Total Assets = Net Income/Sales x Sales/Avg. Invest. = Return on Sales x Asset Turnover ***Elasticity of Supply*** = % Change in Quantity Supplied/% Change in Price ***Income Elasticity of Demand*** = % Change in Quantity Demanded/% Change in Income E1 \> 0 for normal goods E1 \< 0 for inferior goods
47
Marginal Propensity to Save = ? Marginal Propensity to Consume = ? Consumption Function = ?
MPS + MPC = 1 MPS = change in savings/change in income C = C0 + C1YD ``` C = Consumption for period YD = Disposable income for period CO = Constant C1 = Slope of consumption function aka MPC ```
48
Cross Elasticity of Demand Price Elasticity of Demand Price Elasticity of Demand (Arc Method)
***Cross Elasticity of Demand*** Exy = _% Change in Quantity Demanded of X_ % Change in Price of Y *Exy \> 0 for substitutes Exy = 0 for unrelated goods Exy \< 0 for complements* ***Price Elasticity of Demand*** ED = % Change in Quantity Demanded/% Change in Price ***Price Elasticity of Demand (ARC Method)*** ED = _Change in Quantity Demanded_ _Change in Price__ _ Average Quantity / Average Price
49
Interpretation of Elasticity of Demand & Supply
ED or S \> 1 then Elastic ED or S = then Unitary ED or S \< 1 then Inelastic
50
GDP Gap
GDP Gap = Potential Gap - Real Gap A positive (+) gap means that there are unemployed resources; may lead to unemployment A negative (-) gap means that the economy is running above normal capacity; may lead to rising prices
51
Contribution Margin
CM = SP - VC (always $) CMR = SP - VC/SP (always %) amount required to cover fixed costs CM per unit = NI/Margin of safety (in units) CMR = NI/Margin of safety (in $)
52
Margin of Safety (in units or $'s) Before & After Tax Profits BEPsales BEPunits
**Margin of Safety** = Current Sales Level - BEP **Before Tax Profit (EBIT) **= After Tax Profit/1 - Tax Rate **After Tax Profit** = Before Tax Profit x 1 - Tax Rate **BEPsales** = Total Fixed Costs/CMR ***or*** _Total FC + Before Tax Profit _ CMR Only use the latter when they mention profit **BEPunits** = Total Fixed Costs/CM per unit ***or*** _Total FC + EBIT_ CM per unit Only use the latter when they mention profit
53
To calculate difference in net income between variable and absorption costing....
Change in Ending Inventory x FOH per unit
54
Absorption or Full Costing
**_Income Statement_** Sales Production \> Sales = Higher NI _- COGS (DM, DL, VOH, FOH)_ Production \< Sales = Lower NI = Gross Profit or Gross Margin Production = Sales = Same NI _- Period Costs (Fixed & Var)_ *than variable costing* = Net Income * GAAP * Used for external reporting * Treats FOH as a *PRODUCT* cost
55
Direct or Variable Costing
**_Income Statement_** Sales _- Variable COGS (DM, DL, VOH)_ Production \> Sales = Lower NI = Manufacturing CM Production \< Sales = Higher NI _- Variable Period Costs_ Production = Sales = Same NI = Contribution Margin * Than absorption costing* _- Fixed Costs (FOH as Period Cost)_ = Net Income * NOT GAAP * Used for internal decision making * Treats FOH as a *PERIOD* cost
56
Abnormal & Normal Spoilage Process Costing Equivalent Units of Production (EUP), or Equivalent Finished Units (EFU) Prime Costs Conversion Costs
* Abnormal Spoilage* = PERIOD cost * Normal Spoilage* = PRODUCT cost **_Process Costing_** 1. Calculate # shipped (in whole units) 2. Calculate equivalent finished units 3. Calculate cost per EFU 4. Complete WIP T-account * Prime Costs*: DM Used and DL Used * Conversion Costs:* DL Used & Variable & Fixed OH Applied
57
Cost of New Common Stock
**ks = (D1 / P0 - F) + expected g** Where: ks = cost of new common equity D1 = next expected divident P0 = Current Stock Price g = growth rate in earnings F = floatation cost per share
58
Dividend-Yield-Plus-Growth-Rate Approach
**ks = (D1 / P0) + expected g** ## Footnote Where: ks = cost of existing common equity D1 = next expected dividend P0 = current stock price g = growth rate in earnings
59
Bond-Yield-Plus Approach
ks = Long Term Debt Interest Rate + (3% - 5% Risk Premium) Where ks = cost of existing common equity
60
Capital Asset Pricing Model (CAPM)
**ks = kRF + (kM - kRF) - bi** Where: ks = cost of existing common equity kRF = risk free rate kM = expected market return bi = stock's beta coefficient
61
Cost of Preferred Equity Cost of Debt (Before-Tax) Cost of Debt (After-Tax)
Preferred Dividend / Preferred Stock Issue Price Interest Payment / Debt Price - Floatation Cost Interest Rate x (1 - Tax Rate)
62
Degree of Financial Leverage (DFL) Degree of Operating Leverage (DOL) Nominal Rate for Discount Period
DFL = % change in EPS (Basic) / % change in EBIT DOL = % change in Operating Income / % change in Unit Volume _ Discount % _ x _360 or 365 days_ 1 - Discount % Pmt. Period - Discount Period
63
Reorder Point Economic Order Quantity (EOQ)
**(# of Units sold/day x Purchase Lead Time in Days) + Safety Stock** ## Footnote ``` **EOQ = Square Root of --- 2aD / k** a = ordering cost per order D = annual demand k = carrying cost for 1 unit for 1 year ```
64
Payables Deferral Period Receivables Conversion Period or Receivables Collection Period aka # of days sales outstanding Inventory Conversion Period aka # of days sales in inventory Cash Conversion Cycle
* *Average AP / Purchases per day or COGS per day** * Avg. length of time b/w the purchase of materials & labor & payment of cash for them* * *Average AR / Credit sales per day** * Average time required to collect AR* **Average Inventory / COGS per day or sales per day** Inventory Conversion Period *(shorten, lengthen)* + Receivables Conversion Period *(shorten, lengthen)* _- Payables Deferral Period_* (lengthen, shorten)* = Cash Conversion Cycle *(short, long)*
65
Internal Rate of Return Net Present Value Accounting Rate of Return
* IRR: Uses PV Tables; the interest rate that would make PV of investment = PV of benefits from investment. The annuity factor that would make these equal is the same number as the payback period * NPV: Uses PV Tables * ​If PV of Investment \> PV of Benefits from Investment * ​NPV is negative and this is a poor investment * If PV of Investment \< PV of Benefits from Investment * ​NPV is positive and this is a good investment * ​If NPV of Investment = PV of Benefits from Invest. * ​NPV is 0 and mgmt would be indifferent * ​​ARR = the percentage of return on investment each year * ​Net Income / investment
66
Payback Period
The # of years to recoup the investment in cash: = Investment / Annual Cash Flow Where: Annual Cash Inflow (Before Depr., Amort, & Taxes) _- Dep/Amort Expense_ = NIBT - Taxes - NIAT _+ Dep/Amort Expense_ = Annual Cash Inflow, Net of Tax
67
Annuity
* Ordinary annuity or annuity in arrears means the payments are made at the END of the period * Annuity Due or annuity in advance means payments are made at the BEGINNING of the period * Go from Ordinary Annuity to Annuity Due * ​OA Factor (1 + i) = AD Factor * ​Go from Annuity due to Ordinary Annuity * ​AD Factor / (1 + i) = OA Factor
68
Effective Annual Interest Rate Coefficient of Variation Forward Premium or Discount *(of one currency w/ respect to another currency)*
(1 + Stated Ann. Int. Rate / Compounding Frequency)Comp. Freq. - 1 Standard Deviation / Expected Return * A measurement of risk, where a lower # is less risky* Forward Rate - Spot Rate / Spot Rate x _Months or Days in the Year_ Months or Days in Forward Per.
69
Money Measures M1, M2, M3
Currency _+ Demand Deposits_ = M1 + Savings Accounts _+ Small Time Deposits (\< $100,000)_ = M2 _+ Large Time Deposits (\> $100,000)_ = M3
70
Disposable Income Effective Interest Rate = Approximated Cost of not taking a discount =
Disposable = Personal Income - Personal Taxes Effective Int. Rate = Interest Paid / Princ. Avail x (365/days of loan) or Interest Cost / Funds Available (Disc. % / 100% - Disc. %) x (365 days / Total Pay Period - Disc. Per.)
71
Examples of Carrying Costs (5)
* Storage * Interest * Spoilage * Insurance * Property Taxes
72
Re-order Point =
(# of units sold per day x Purchase Lead / Time in days) + Safety St.
73
Factors considered when choosing securities (5)
* Minimum investment required * Safety * Marketability (liquidity) * Maturity * Yield ​Most important considerations are liquidity & safety
74
Float
The time that elapses relating to mailing, processing, and clearing checks. Exists for payments & receipts of cash. Effective cash management involves extending float for disbursements and shortening float for cash receipts.

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