Flashcards in Performance Measures Deck (27):

1

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What four perspectives are included in Balanced Scorecard?

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Financial

Customer

Internal Business Processes

Learning and Growth

2

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What are Strategy Maps?

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Diagrams of Strategic Cause and Effect Relationships.

3

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What is a Strategic Initiative?

###
A plan to achieve goals.

4

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What measures are used under Value-Based Management?

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Return on Investment

Residual Income

Spread

Economic Value Added

Free Cash Flow

5

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How is Return on Investment (ROI) calculated?

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"ROI = Return / Investment

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

$60 / $100 = 60% ROI"

6

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How is Residual Income calculated?

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

7

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

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

8

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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%"

9

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How is Spread calculated?

###
Spread = ROI - Cost of Capital

10

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

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

Economic Value Added = Operating Income After Tax - WACC(Total Assets - Current Liablities)

11

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How is Free Cash Flow calculated?

###
Operating Income After Tax

+ Depreciation & Amortization

- Capital Expenditures

- Change in Net Working Capital

= Free Cash Flow"

12

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What is measured by Six Sigma?

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

Six sigma = 3.4 defects per million parts

13

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What is the Asset Turnover Ratio?

###
Sales / Average Assets

14

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

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"Can the company pay their short-term liabilities?

Current Ratio = Current Assets / Current Liabilities"

15

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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"

16

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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"

17

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

###
"How profitable is the product after COGS?

Gross Margin : Gross Profit / Net Sales"

18

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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"

19

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

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"Can the company make their interest payments?

Times Interest Earned : Earnings Before Tax & Interest / Interest Expense"

20

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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"

21

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How is Market/Book ratio calculated?

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

22

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What is Inventory Turnover and how is it calculated?

###
"How quickly does inventory get sold?

Inventory Turnover : COGS / Average Inventory"

23

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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"

24

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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"

25

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What is an Internal Failure?

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

26

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What is an External Failure?

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

This includes recalls."

27