Performance Measures Flashcards

Question

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

Answer 1

How many days does it take the company to collect payment on A/R? Average Collection Period = Average AR / Average Sales Per Day

Answer 2

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

Answer 3

Product reaches the customer- but they are not satisfied with the quality of the product. This includes recalls.

Answer 4

Quality control- testing & inspection costs.

Answer 5

The components of the Balanced scorecard are: 1. Strategic objectives 2. Performance measures 3. Baseline performance 4. Targets 5. Strategic initiatives

Answer 6

A Strategic objective is a statement of what the strategy must achieve and what is critical to its success

Answer 7

Performance measures describe how success in achieving the strategy will be measured and tracked

Answer 8

Baseline performance is the current level of performance for the performance measure

Answer 9

A Target is the level of performance or rate of improvement needed in the performance measure

Answer 10

The performance measures in the Financial perspective of the balanced scorecard are as follows: 1. Return on investment (ROI) 2. Economic profit 3. Economic value added 4. Cash flow ROI 5. Free cash flow 6. Net income / sales ratio 7. Sales / asset ratio 8. Revenue growth 9. Revenue from new products (existing customers) 10. Revenue from new products (new customers) 11. Cost of sales % In general, look for income statement and balance items -a financial statement line item

Answer 11

Strategic initiatives are key action programs required to achieve strategic objectives

Answer 12

The Value chain in the balanced scorecard framework is the sequence of business processes in which usefulness is added to the products or services of a company and includes: 1. Innovation process 2. Operations process 3. Post-sales process The value chain is one way to describe the internal process perspective in the balanced scorecard and its performance measures

Answer 13

The performance measures in the Customer perspective of the balanced scorecard are as follows: 1. Customer satisfaction 2. Customer retention 3. Customer acquisition 4. Percentage of highly satisfied customers 5. Depth of relationship 6. Percentage of business from customer referrals 7. Customer satisfaction with new product/service offering In general, look for terms relating to "customers"

Answer 14

The performance measures in the Learning and growth perspective of the balanced scorecard are as follows: 1. Employee satisfaction and engagement 2. Employee turnover 3. Employee objectives linked to the balanced scorecard 4. Employee awareness of the strategy 5. Percentage of employees trained in total quality management 6. Number of six-sigma black belts 7. Performance improvement from employees' suggestions 8. Percentage of ideas and best practices shared across organization 9. Percentage of R&D employees to total employees 10. R&D expenditure as a % to sales revenue In general, look for the word "employees" or "research & development" for this category

Answer 15

If you see something (an answer choice) that seems to relate to how the business is ran or something to do with the business, it is in the internal process perspective category

Answer 16

The profitability ratios are: 1. Gross Margin 2. Operating profit margin 3. Return on assets / ROI 4. Return on equity 5. Dividend payout ratio Profitability ratios measure how effective a firm is at generating profit from operations

Answer 17

The asset utilization ratios are: 1. Receivable turnover 2. Average collection period 3. Inventory turnover 4. Total asset turnover Asset utilization ratios measure the time it takes to convert various assets to sales or cash. These ratios are used to measure the efficiency with which assets are managed

Answer 18

The Liquidity ratios are: 1. Current ratio 2. Quick or Acid ratio Liquidity ratios measure the firm's ability to meet its short-term obligations as they come due

Answer 19

The Debt utilization ratios are: 1. Debt to total assets 2. Debt to equity 3. Times interest earned Debt utilization ratios measure the effectiveness with which management finances the assets of the firm. They are used to evaluate the financial leverage of the firm

Answer 20

Economic Value Added (EVA) EVA = NOPAT - (i x [Total Assets - Current Liabilities]) NOPAT = Net operating profit after taxes i = WACC EVA measures stress the importance of making investments only when the return exceeds cost and, in the process, value to the stockholder is maximized Note: EVA measures is useful for incentive based compensation (employee bonus & stock options), resource allocation (budgeting) and investor relations However, using EVA alone can have certain disadvantages by failing to reflect all the pathways to value creation, such as the following balanced scorecard perspectives: customer, learning & growth, and internal business process

Answer 21

The Market ratios are: 1. Price / earnings ratio 2. Market / book ratio Market ratios involve measures that consider the market value of the firm's common stock

Answer 22

Free Cash Flow formula is: ``` NOPAT + Deprn Exp / Amort Exp - Capital Expenditures - Δ in working capital requirements = Free Cash Flow ``` NOPAT = Net Operating Profit after Taxes

Answer 23

Gross Margin (Gross Profit) formula is: Net Sales - COGS = Gross Margin or Gross Profit Gross Sales - Sales discounts - Sales returns + allowances = Net Sales - COGS or COS = GM or GP Gross margin measures the % of each sales dollar remaining after payment for the goods sold

Answer 24

Operating Profit (EBIT) Margin formula is: Operating Profit / Operating Income / EBIT / Net Sales = Operating Profit Margin Gross Margin or Gross Profit - Operating Expenses: R&D, Selling, G&A, Organization costs, Impairment loss (SEC companies) = Operating Income / Operating Profit / EBIT Operating profit margin measures the % of each sales dollar that remains after the payment of all cost & expenses except for interest and taxes

Answer 25

Profit Margin formula is: ``` Net Income (Net Income after Profit & Tax) / Net Sales ``` = Profit Margin Profit margin ratio is used to find the proportion of revenue that finds its way into profits

Answer 26

The Return on Assets (ROI) formula is: Net Income / Average Total Assets = ROA or ROI and Net Income * Net Sales / Net Sales / Average Total Assets Gross Sales - Sales discounts - Sales returns + allowances = Net Sales ROI measures the % return generated on the assets available (investment)

Answer 27

Cash Flow ROI represents the average real cash return of all existing projects as reflected in the financial statements. This approximates the IRR for all projects

Answer 28

The Return on Equity formula is: NI after Interest & Taxes (Net Income) / Average Common Stockholders Equity = ROE Note: We only want stockholders equity that is associated with the common stockholders. So, we do the following: ``` Total SHE - P/S par value - P/S dividends (including amounts in arrears) - P/S liquidating dividend premium = SHE for Common stockholders ** ``` ** You will have to compute this formula for the current year and the previous year; then add them total together and divide by 2 to calculate the average. It is the average number that will go in the denominator ROE measures the % return generated to common stockholders

Answer 29

Account Receivable Turnover is calculated as follows: Net Credit Sales / Average Account Receivables, net * = AR Turnover * - We use the A/R, net amount as in: A/R, gross - Allowance = A/R, net AR turnover measures the number of time per year the balance of receivables is collected. Important measure of the efficiency with which management is managing A/R

Answer 30

The Dividend payout ratio formula is: Cash dividend per Common Share / Earnings per Common Share (EPS) = Dividend payout Ratio The dividend payout ratio measures the dividend paid in relation to net earnings

Answer 31

Average Collection Period is calculated as follows: 365 / AR Turnover = Average Collection Period The average collection period measures the average number of days it takes to collect an account receivable

Answer 32

Inventory turnover is calculated as follows: COGS / Average Inventory = Inventory turnover ``` Gross purchases - Purchase discounts - Purchase returns & allowances = Net purchases + Freight-In / Transportation-In ** = COG Purchased ``` ``` Beginning Inventory + COG Purchased = COGAS - Ending Inventory COGS ``` ** - this is the cost of getting your goods from the vendor/supplier to you Inventory turnover measures the efficiency with which a firm utilizes (manages) its inventory

Answer 33

The Number of Days' sales in Inventory formula is as follows: 365 days / Inventory turnover = # of Days' sales in Inventory This is another measure to evaluate the efficiency with which a firm utilizes (manages) its inventory

Answer 34

Total Asset Turnover is calculated as follows: Net Sales / Average Total Assets = Total Asset Turnover Total asset turnover measures the efficiency with which the firm uses its total assets

Answer 35

Current ratio is calculated as follows: Current Assets ** / Current Liabilities *** = Current Ratio ** - current assets consist of the following: cash, short-term investment (including current maturities on LT investments), receivables, inventory & prepaid assets *** - current liabilities consist of the following: A/P, accrued salaries, accrued expenses, sales tax payable (if due within 1 year), and deferred/unearned revenue The current ratio is the most common measure of short-term liquidity

Answer 36

Quick (Acid) Ratio is calculated as follows: Cash + A/R (net) + Marketable securities / Current liabilities = Quick (Acid) Ratio The quick (acid) ratio provides a more conservative measure of short-term liquidity

Answer 37

Debt-to-total assets ratio is calculated as follows: Total liabilities / Total Assets = Debt-to-total assets Debt to total assets measures the proportion of total assets financed with debt and therefore, the extent of financial leverage

Answer 38

Debt-to-Equity ratio is calculated as follows: Total liabilities / Total Equity = Debt-to-Equity Debt to equity measures the extent of the firm's financial leverage

Answer 39

Price / Earnings ratio is calculated as follows: Stock price per share / EPS = Price / Earnings ratio Price / earnings (PE) ratio is the most commonly quoted market measure

Answer 40

Market / Book ratio is calculated as follows: Book value per share = Common stockholders Equity ** / # of shares of Common stock outstanding *** ``` ** - Formula is: Total SHE - P/S par value - P/S dividends (including in arrears) - P/S liquidating premium = SHE for Common stockholders ``` *** - remember that treasury stock is issued but NOT outstanding. So this amount excludes treasury stock

Answer 41

Times interest earned ratio is calculated as follows: EBIT (Operating Profit or Operating Income) / Interest Expense ** = Times interest earned ** - this is usually in the "other expenses & losses" section of the multi-step income statement Times interest earned measures the firm's ability to make contractual interest payments

Answer 42

Cross-sectional analysis involves benchmarking the ratios against ratios of similar firms at a point in time

Answer 43

Horizontal analysis involves an evaluation of the firm's ratios and trends over time (i.e. analyzing various ratios for the same company over time - over multiple accounting periods)

Answer 44

Benchmarking is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance There are 4 different types of benchmarking 1. Internal benchmarking 2. Competitive benchmarking 3. Functional or industry benchmarking 4. Generic benchmarking

Answer 45

Internal benchmarking involves comparing similar operations within different units of the same organization

Answer 46

Competitive benchmarking targets processes and methods used by an organization's direct competitors

Answer 47

Functional or industry benchmarking involves comparing similar functions within the same broad industry

Answer 48

Generic benchmarking involves comparing processes that are independent of industry

Answer 49

Total quality management focuses on managing the organization to excel in quality in all dimensions of products and services for customers

Answer 50

Six-sigma is a statistical measure expressing how close a product comes to its quality goal.

Answer 51

Six-sigma black belts must attend a minimum of 4 months of training in statistical and other quality improvement methods They are experts in six-sigma methodology. They learn and demonstrate proficiency in the DMAIC methodology and statistical process control (SPC) techniques within that methodology DMAIC is the structured methodology for process improvement within the six-sigma framework ``` D - Define M - Measure A - Analyze I - Improve C - Control ```

Answer 52

ISO 9000 series is a series of standards agreed upon by the International Organization for Standardization (ISO) and consist of five parts - 9000 - 9004

Answer 53

ISO 14000 series was developed to control the impact of an organization's activities on the environment and focuses on the following: 1. reducing the cost of waste management 2. conserving energy and materials 3. lowering distribution costs

Answer 54

Total quality control is the application of quality principles to all company activities. Also known as total quality management (TQM)

Answer 55

Continuous improvement seeks continual improvement of machinery, materials, labor and production methods, through various means including suggestions & ideas from employees and customers

Answer 56

Kaizen is the Japanese art of continuous improvement. A philosophy of continuous improvement of working practices that underlies total quality management and just-in-time business techniques

Answer 57

Cause-and-effect (fishbone or Ishikawa) diagrams identify the potential causes of defects Four categories of potential causes of failure are: 1. Human factors 2. Methods & design factors 3. Machine-related factors 4. Materials & components factors Cause-and-effect diagrams are used to systematically list the different causes that can be attributed to a problem (or an effect). These diagrams can aid in identifying the reasons why a process goes out of contro

Answer 58

A Pareto chart is a bar graph that ranks causes of process variations by the degree of impact on quality The "Pareto Principle" states that 80% of the problems come from 20% of the causes

Answer 59

Control charts are statistical plots derived from measuring factory processes: they help detect "process drift" or deviation before it generates defects Control charts also help spot inherent variations in manufacturing processes that designers must account for to achieve "robust design"

Answer 60

Robust design is a discipline for making designs "production-proof" by building in tolerances for manufacturing variables that are known to be unavoidable

Answer 61

Poka-yoke involves making the workplace mistake-proof (i.e. a machine fitted with guide rails permits a part to be worked on in just one way)

Answer 62

Cost of quality is based on the philosophy that failures have an underlying cause, prevention is cheaper than failures, and cost of qualify performance can be measured Cost of quality consists of 4 components: 1. Prevention cost 2. Appraisal cost (also known as detection costs) 3. Internal failure cost 4. External failure cost

Answer 63

The cost of prevention is the cost of any quality activity designed to help do the job right the first time 1. Maintenance of machines 2. Training employees 3. Quality engineering, training, circles, improvement projects 4. Audits of the effectiveness of the quality system

Answer 64

Appraisal cost (Detection cost) is the cost of quality control including testing and inspection. It involves any activity designed to appraise, test, or check for defective products In addition, anything involving statistical sampling would be associated with appraisal cost

Answer 65

Internal failure cost are costs incurred when substandard products are produced, but discovered before shipment to the customer. The following are examples of internal failure costs: 1. Scrap 2. Waste 3. Rework 4. Rework labor and overhead 5. Downtime 6. Debugging software errors

Answer 66

External failure cost is the cost incurred for products that do not meet requirements of the customer and have reached the customer 1. Warranty repairs 2. Customer complaints 3. Product recalls 4. Liability resulting from defective products 5. Excess returns 6. Lost sales from returns 7. Bad press 8. Excess returns & allowances arising from quality problems

Answer 67

Business process management focuses on continuously improving processes to align all activities with the desires and needs of the customer As a managerial approach, business process management views processes as strategic assets that must be understood, managed, and improved The life cycle of business process management includes: 1. Design 2. Modeling 3. Execution 4. Monitoring 5. Optimization

Answer 68

The design phase involves identification of existing processes and design of process improvements Good process design is critical to preventing problems over the life of the process

Answer 69

In the modeling phase management simulates the process in a test environment and performs "what if" analysis to try to determine how it will work under varying conditions

Answer 70

The execution phase involves installing software, training personnel, and implementing the new processes It also involves testing the new processes

Answer 71

The optimization phase of the life cycle involves retrieving performance statistics from modeling or monitoring and identifying bottlenecks or other problems for additional improvement of the process As processes are analyzed for improvement, it is sometimes discovered that processes that were once performed by several departments should be centralized in one department (centralization) Also, management may decided to outsource a process to an external organization or outsource a process to another country (off-shoring) Benefits of off-shoring may include: 1. Tax benefit 2. Scalability 3. Allows company to focus on its core competencies. However, there are additional risks such as: 1. Quality risk 2. Language risk 3. Information security risks 4. Intellectual property risk 5. Public opinion risk 6. Social responsibility risk These risks can be mitigated by implementation of policies & controls including using effective operating agreements

Answer 72

The monitoring phase is continuous after the execution phase It involves tracking the processes with performance statistics

Answer 73

Reengineering is the fundamental rethinking and redesign of business process to achieve improvements in critical measures of performance such as cost, quality, service speed and customer satisfaction

Answer 74

Lean manufacturing is an operational strategy focused on achieving the shortest possible cycle time by eliminating waste The technique often decreases the time between a customer order and shipment and is designed to improve the following: 1. Profitability 2. Customer satisfaction 3. Throughput time 4. Employee morale

Answer 75

The theory of constraints refers to methods to maximize operating income when face with some bottleneck operations The objective of the theory of constraints is to increase throughout contribution while decreasing investment and operating costs

Answer 76

Bottleneck resources are any resource or operation where the capacity is less than the demand placed upon it In other words, demand is greater than capacity

Answer 77

Non-bottleneck resources have capacity greater than demand

Answer 78

Throughput contribution is the following: Revenue Less: Direct materials of COGS = Throughput contribution

Answer 79

Operating costs include the following: 1. Salaries & wages 2. Rental expense 3. Utilities 4. Depreciation

Answer 80

Investment is considered to be the sum of following costs: 1. Materials 2. Indirect materials 3. WIP 4. Finished goods inventories 5. R&D 6. Equipment & buildings

Answer 81

In a ratio where the numerator is GREATOR than the denominator, if we INCREASE the numerator and dominator by an equal amount, this actually DECREASES the ratio from the starting point

Answer 82

In a ratio where the numerator is GREATOR than the denominator, if we DECREASE the numerator and dominator by an equal amount, this actually INCREASES the ratio from the starting point

Answer 83

In a ratio where the denominator is GREATOR than the numerator, if we INCREASE the numerator and dominator by an equal amount, this actually INCREASES the ratio from the starting point

Answer 84

In a ratio where the denominator is GREATOR than the numerator, if we DECREASE the numerator and dominator by an equal amount, this actually DECREASES the ratio from the starting point

Performance Measures Flashcards

(108 cards)