ACC 211 Exam 4 Thornton

Liquidity Ratios

measure the ability of a company to meet its current obligations

Leverage Ratios

measure the ability of a company to meet its long- and short-term obligations. These ratios provide a measure of the degree of protection provided to a company's creditors

Profitability Ratios

measure the earning ability of a company. These ratios allow investors, creditors, and managers to evaluate the extent to which invested funds are being used efficiently

Accounting rate of return

measures the return on a project in terms of income, as opposed to using a project's cash flow

What do meaningful ratios compare?

past history of the company and industrial averages

What is the return on stockholders' equity used for?

provides a measure that can be used to compare against other return measures (e.g., preferred dividend rates and bond rates)

What is the percent of sales that ends up as net income?

return on sales

What does a low accounts receivable turnover represent?

suggests a need to modify credit and collection policies to speed up the conversion of receivables to cash

Net present value (NPV)

the difference between the present value of the cash inflows and outflows associated with a project

Payback period with uneven cash flows

the payback period is computed by adding the annual cash flows until such time as the original investment is recovered

What does earnings per share represent?

the profitability of a company because it calculates the earnings generated per share of common stock

How is ROI used in decision-making?

used by businesses to identify the efficiency of an investment or number of different investments

RI

Return Investment -the difference between operating income and the minimum dollar return required on a company's operating assets

present value of a single amount

The amount at a present time that is equivalent to a payment or an investment at a future time

present value of an annuity

The amount at a present time that is equivalent to a series of payments and interest in the future.

Advantages of using payback period

The payback period can be used to choose among competing alternatives

What does the cost of capital represent?

The required rate of return; is the minimum acceptable rate of return

Disadvantages of a postaudit

They're costly

Comparing mutually exclusive projects

-Assess the cash flow pattern for each project -Compute the NPV for each project -Identify the project with the greatest NPV

Balance Scorecard's four perspectives

-Financial -Customer -Internal Business Processes -Learning and Growth (Infrastructure)

Disadvantages of using payback period

-It ignores the cash flow performance of the investments beyond the payback period -It ignores the time value of money

What are the three ratio categories?

-Liquidity -Leverage -Profitability

MCE

-Manufacturing Cycle Efficiency -Value - Added time/Total time

Advantages of a postaudit

-Resource Allocation: By evaluating profitability, postaudits ensure that resources are used wisely Positive Impact on -Managers' Behavior: If managers are held accountable for the results of a capital investment decision, they are more likely to make such decisions in the best interests of the firm -Independent Perspective: A postaudit by an independent party ensures more objective results

Types of Profitability Ratios

-Return on Sales -Return on total Assets -Return on Common Stockholders Equity -Earnings per share -Price Earnings Ratio -Dividend Yield and Payout Ratios

Types of Leverage Ratios

-Times-interest-earned-ratio -Debt ratio -Debt-to-equity ratio

IRR Differences

-assumes that each cash inflow is reinvested at the COMPUTED IRR -measures profitability in RELATIVE terms

NPV Differences

-assumes that each cash inflow received is reinvested at the REQUIRED RATE OF RETURN -measures profitability in ABSOLUTE terms

Types of Liquidity Ratios

-current ratio -quick or acid-test ratio -accounts receivable turnover ratio -inventory turnover ratio

How to Calculate ROI

1. ROI= Operating Income/Average Operating Assets 2. ROI = Margin x Turnover

A good investment will earn

Back its original investment and a reasonable return

Decentralization

Delegating decision-making authority to the lower levels of management in a company -has 4 responsibility centers

Having a risky investment doesn't change the desire payback period

False

Profit center of Decentralization

Manager is responsible for both revenues and costs

Investment center of Decentralization

Manager is responsible for revenues, costs, and investments

Cost center of Decentralization

Manager is responsible only for costs

Revenue center of Decentralization

Manager is responsible only for sales, or revenue

Payback period with even cash flows

Payback Period= Original Investment/Annual Cash Flow

Using horizontal analysis versus vertical analysis

While horizontal analysis involves relationships among items over time, vertical analysis is concerned with relationships among items within a particular time period

What does EVA (economic value added) measure?

a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.

Current Ratio

a measure of the ability of a company to pay its short-term liabilities out of short-term assets

What is a testable strategy?

a set of linked objectives aimed at an overall goal

What type of payback period would you want a high-risk investment to have?

a short payback period

Economic Value Added is residual income with the cost of capital equal to the firm's

actual cost of capital

Quick or Acid-Test Ratio

is a measure of liquidity that compares only the most liquid assets with current liabilities

The quick ratio differs from the current ratio in that it

is a stricter test of a company's ability to pay its current debts as they are due

Internal rate of return (IRR)

defined as the interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost

Learning and Growth(infrastructure) of Balanced Scorecard

defines the capabilities that an organization needs to create long-term growth and improvement

Customer Perspective of Balanced Scorecard

defines the customer and market segments in which the business unit will compete

Financial Perspective of Balanced Scorecard

describes the economic consequences of actions taken in the other three perspectives

Internal Business Processes of Balanced Scorecard

describes the internal processes needed to provide value for customers and owners

What makes a good capital investment?

earn back its original capital outlay over its life and, at the same time, provide a reasonable return on the original investment