acct 3

  1. Understanding ROI (Return on Investment)
    • ROI= Net operating Income / Avg operating assets
    • Margin = Net operating Income / Sales
    • Turnover= Sales / Avg operating assets
    • ROI = Margin x Turnover
  2. Residual Income
    = Net Operating Income - ( Avg operating assets x Min. required rate of return)
  3. Comparing ROI to Residual income
    • ROI measure net operating income earned relative to the investment in avg operating assets
    • Residual income measure net operating income earned less the minimum required return on avergage operating assets
  4. Cost center
    a segment whose manager has control over costs but not over revenues or investment funds
  5. Profit Center
    a segment whose manager has control over both costs and revevenues, but no control over investment fun
  6. Investment Center
    A segment whose manager has control over costs, revenues, an investments in operating assets
  7. Traceable Fixed Costs
    arise because of th existence of a particular segment and would disappear over time if the segment itself disappeared
  8. Common Fixed costs
    arise because of the overall operation of the copany and would not disappear if any particular segment were eliminated
  9. Assets included in "operating assets"
    include cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes. Examples of assets that are not included in operating assets (i.e., examples of nonoperating assets) include land held for future use, an investment in another company, or a building rented to someone else
  10. Relevant Cost
    a cost that differs between alternatives.
  11. Net Present Value (NPV)
    determines whether or not the project is an acceptable investment. If NPV is POSITIVE- then the project is acceptable because it promises a return greater than the required rate of return. ZERO - then the project is acceptable because it promises a return equalto the required rate of return. NEGATIVE- then the project is not acceptable because it promises a return less than the required rate of return.
  12. Preference decision
    selecting from among several competing courses of action
  13. Profitability Index
    Net present value of project / Investment required
  14. Payback period
    • the length of time that i takes for a project to recover its initial cost out of the cash receipts that it generates.
    • = Investment required / Net annual cash flow
  15. Simple Rate of Return
    • does not focus on cash flows rather it focuses on accountng net operating income.
    • = Annual incremental net operating income / Initial investment
    • * simple rate of return is not recommended because it ignores the time vaue of money andthe simple rate can fluctuate from year to year
  16. Earning Per Share (EPS)
    (Net income - Preferred Dividends) / Avg. number of common shares outstanding
  17. Dividend Payout Ratio
    Dividends Per Share / Earnings per share
  18. Price Earnings Ratio (P/E)
    Market Price Per Share / Earnings per share
  19. Dividend Yield Ratio
    Dividends per share / Market price per share
  20. Return on Total Assets
    [ Net income / (Interest Expense x (1 - Tax rate) ) ] / Avg. total assets
  21. Return on Common Stockholders Equity
    ( Net income - Preferred Dividends) / Avg. Stockholders equity
  22. Working capital
    the excess of current assets over current liabilities. Current Assets - Current Liabilities
  23. Current Ratio
    • measures a company's short term debt paying ability.
    • Current Assets / Current Liabilities
  24. Acid Test Ratio
    • measures a company's ability to meet obligations withiout having to liquidate inventory. Quick assets include cash, marketable seurities, acounts receivable, current notes receivable
    • Quick Assets / Current Liabilities
  25. Debt to Equity
    • indicates the relative proportionsof debt to equity on a company's balance sheet
    • Total Liabilities / Stockholders Equity
  26. Contribution Margin Ratio
    sales - variable expense = contribution margin therefore total contribution margin / sales
  27. Gross Margin Percentage Ratio
    Gross Margin / Sales
  28. Average Collection Period
    • measures on average hw many days it taks to collect an account receivable
    • 365 days / Accounts Receivable Turnover
  29. Inventory Turnover Ratio
    • measures how many times a companys inventory has been sold and replaced during the year
    • COGS / Average inventory
  30. Average Sale Period
    • measures how many days, on average it takes to sell the entire inventory
    • 365 days / Inventory Turnover
Card Set
acct 3