Flashcards in Performance Measures Deck (28):

1

## What four perspectives are included in Balanced Scorecard?

###
Financial - ROI- Revenue Growth- Profitability

Customer - Increase Customers- Increase Satisfaction

Internal Business Processes - Efficient and Effective Operations- Improve Quality- Reduce Defects

Learning & Growth - Training- Personnel Development

2

## Why was Balanced Scorecard created?

### To measure Performance.

3

## What are Strategy Maps?

### Diagrams of Strategic Cause and Effect Relationships.

4

## What is a Strategic Initiative?

### A plan to achieve goals.

5

## What measures are used under Value-Based Management?

###
Return on Investment

Residual Income

Spread

Economic Value Added

Free Cash Flow

6

## How is Return on Investment (ROI) calculated?

###
ROI = Return / Investment

Example: You Invest $100 to buy a machine that generates $60 in Operating Income

$60 / $100 = 60% ROI

7

## How is Residual Income calculated?

### Operating Income - (Required Rate of Return x Invested Capital) = Residual Income

8

## What is another name for Required Rate of Return (RROR)?

###
RROR is also called 'Cost of Capital'

9

## What is Weighted Average Cost of Capital (WACC)? How is it calculated?

###
Cost of Capital is the weighted average of the interest rates you pay for your Capital.

Includes Debt and the Rate of Return your Equity Shareholders expect

Example: 45% of your Capital is supported by debt and has an interest rate of 9%. 55% of your Capital is supported by equity and shareholders expect a ROR of 12%

Your Cost of Capital is: (.45 x .09) + (.55 x .12) = 10.65%

10

## How is Spread calculated?

### Spread = ROI - Cost of Capital

11

## What is the primary point of Economic Value Added? How is it calculated?

###
Investments should exceed costs- with an emphasis on stockholder value.

Economic Value Added = Operating Income After Tax - (Net Assets x WACC)

12

## How is Free Cash Flow calculated?

###
Operating Income After Tax

+ Depreciation & Amortization

- Capital Expenditures

- Change in Net Working Capital

= Free Cash Flow

13

## What is measured by Six Sigma?

### It measures a product versus its quality goal.

14

## What is the Asset Turnover Ratio?

### Sales / Average Assets

15

## What does the Current Ratio tell us? How is it calculated?

###
Can the company pay their short-term liabilities?

Current Ratio = Current Assets / Current Liabilities

16

## What does the Debt to Equity Ratio tell us? How is it calculated?

###
How is the company financing its capital?

Debt to Equity Ratio = Total Debt / Total Equity

17

## What does the Debt to Total Assets ratio tell us? How is it calculated?

###
What proportions of the company's assets are encumbered with debt?

Debt to Total Assets = Total Liabilities / Total Assets

18

## What does Gross Margin % tell us? How is it calculated?

###
How profitable is the product after COGS?

Gross Margin = Gross Profit / Net Sales

19

## What does Operating Profit Margin tell us? How is it calculated?

###
How profitable is the product after all expenses (except interest and taxes)?

Operating Profit Margin = Operating Profit / Net Sales

20

## How is Times Interest Earned calculated and what does it mean?

###
Can the company make their interest payments?

Times Interest Earned = Earnings Before Tax & Interest / Interest Expense

21

## What does Return on Assets tell us? How is it calculated?

###
What % return are the assets generating?

Return on Assets = Net Income (net of interest & taxes) / Average Total Assets

22

## How is Market/Book ratio calculated?

### Market Value of Common Stock / Book Value of Common Stock

23

## What is Inventory Turnover and how is it calculated?

###
How quickly does inventory get sold?

Inventory Turnover = COGS / Average Inventory

24

## What is the Quick Ratio and how is it calculated?

###
It measures short-term liquidity- and only includes assets that are quickly available (i.e. not inventory)

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

25

## What is Average Collection Period- and how is it calculated?

###
How many days does it take the company to collect payment on A/R?

Average Collection Period = Average AR / Average Sales Per Day

26

## What is an Internal Failure?

### Products have quality defects- but are caught BEFORE they leave the warehouse.

27

## What is an External Failure?

###
Product reaches the customer- but they are not satisfied with the quality of the product.

This includes recalls.

28