managerial accounting quiz 5

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  1. Capital budgeting
    Tools used to evaluate investments in long lived capacity resources.
  2. Time value of money
    $1 today is worth more than $1 a year from now.
  3. 4 elements of project cash flows
    • 1. initial outlay
    • 2.Estimated life and salvage value of asset
    • 3. Operating cash flows for each year of asset life
    • 4.Cost of capital
  4. Initial outlay
    All up-front costs incurred to ready the asset for its intended use.(Purchase price+costs of delivery,installation etc)
  5. Asset life
    How long we're going to use an asset
  6. salvage value
    residual value from disposing of the asset at the end of its useful life.
  7. cost of capital
    rate of return that providers of capital expect from their investment.
  8. NPV(definition)
    total present value of all cash flows from a project
  9. NPV formula
    • Net cash flows in whichever period it is
    •          1                           
    • (1+r)^(whichever period is)
    • do this for each period and add them all up
  10. IRR (definition)
    Discount rate in which NPV is zero
  11. in IRR the project is profitable if_______
    IRR>cost of capital
  12. Payback period(definition)
    how long it takes to recoup the initial investment
  13. payback period(formula)
    • initial outlay/annual cash flow
    • (only used if cash flows are the same in all years)
  14. modified payback(formula)
    • net cash flow*present value factor.
    • (add these up until initial outlay is paid back)
  15. accounting rate of return(formula)
    • average annual income from project
    •          average investment
  16. annual income(formula)
    annual cash flow-depreciation
  17. average investment(aka average book value of asset)(formula)
    (beginning book value=ending book value)/2
  18. decentralization
    need to measure and evaluate performance of managers of individual divisions or business units within the firm.
  19. 3 types of responsibility centers
    • 1. cost center
    • 2. profit center
    • 3. investment center
  20. cost center
    controls costs, but not revenues or investments
  21. profit center
    controls costs and revenues, but not investments.
  22. investment center
    controls costs, revenues and investments
  23. Two main goals for cost center managers(short and long term)
    • short term: achieving cost targets for a given level of output.
    • long-term: continuous efficiency improvements to reduce costs.
  24. Short term performance measures for cost center managers
    Usually, focus on flexible budget variances.
  25. long term performance measures for cost center managers
    benchmarking and Kaizen
  26. benchmarking
    compare efficiency of various activities and business processes in the firm against best practices in the industry.
  27. kaizen
    (continuous improvement): hold managers accountable for achieving sustained cost reduction.
  28. 3 main measures to evaluate performance of investment centers.
    • return on investment
    • residual income
    • Economic value added
  29. ROI(formula)
    • Profit/investment
    • OR
    • Profit margin*asset turnover
  30. profit margin(formula)
  31. Asset turnover(formula)
  32. Residual income(aka RI) (formula)
    Profit-(required rate of return*investment)
  33. economic value added(formula)
    NOPAT-{WACC*(invested capital-current liabilities)
  34. Net operating profit after taxes(aka NOPAT) (formula)
    (1-taxrate)*net operating profit before taxes
  35. WACC(definition)
    weighted average cost of capital
Card Set
managerial accounting quiz 5
Chapters 11,12
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