Performance Measurement (1)

Question 1

What does performance measurement aim to establish?

Answer 1

How well something or somebody is doing in relation to a plan

Question 2

What are financial performance indicators? (company’s performance)

Answer 2

Analysis and interpretation of a company’s accounts will give an indication of company’s performance and financial position

Question 3

What are financial performance indicators? (assess potential performance)

Answer 3

Try to assess potential future performance or to identify weakness

Question 4

What does a company performance assessment involve?

Answer 4

Ratio analysis

Review of accounts to highlight issues not disclosed by ratio analysis

Review of benefits/wealth from point of view of other stakeholders

Analysis of financial and non-financial from external sources

Question 5

What is profitability?

Answer 5

How well a company performs, given its asset base

Question 6

What is liquidity?

Answer 6

Short-term financial position

Question 7

What is gearing/

Answer 7

A measure of risk

Question 8

What are the basis for comparison?

Answer 8

Over time
With other companies
With industry averages
With other performance measures

Question 9

What does ROCE state?

Answer 9

Profit as a percentage of capital employed and shows how well the business utilises the funds invested in it

Question 10

Three comparisons for ROCE?

Answer 10

Change in ROCE from year to year

To other similar business

To the market borrowing rate

Question 11

If both profit margin and asset turnover are deteriorating?

Answer 11

Shows company has a profitability problem

Question 12

How can capital employed be improved?

Answer 12

By selling unused assets

Question 13

What can a high profit margin indicate?

Answer 13

Either sales prices are high or total costs are being kept well under control

Question 14

What can a high gross profit margin indicate?

Answer 14

Sales prices are high or production costs are being kept well under control

Question 15

What does asset turnover?

Answer 15

The turnover generated from each $1 worth of assets employed

Question 16

What is liquidity?

Answer 16

Amount of cash a company can obtain quickly to settle its debts

Question 17

A company that has large volumes of inventories and receivables?

Answer 17

Might be overinvesting in working capital, so tying up more funds in business than it needs to

Question 18

What does a lengthening invnetory turnover period indicate?

Answer 18

Slowdown in trading or a build-up in inventory levels

Question 19

What does business risk refer to?

Answer 19

The variability in earnings which is due to business activities of the organisation

Question 20

What is operational gearing?

Answer 20

Ratio which is calculated to quantify business risk

Question 21

Operational gearing calculation?

Answer 21

Contribution / PBIT

Question 22

What if operating gearing is high?

Answer 22

This indicates that a large proportion of the organisation’s operating costs are fixed

Question 23

When do fixed costs make profit more volatile?

Answer 23

As PBIT becomes more vulnerable to downturns in business volume