BUS202 Final - Conceptual

Who is responsible for the material you buy?

The purchasing department

A company’s cost of capital…

is what management expects to pay on all borrowed and equity funds. It does not relate to the cost of funding a specific project.

When would you have an unfavorable material quantity variance?

Actual > Standard = Unfavorable

What do you call the act of going back and re-evaluating your capital analysis and comparing it to the actual results?

Post-audit

Which would be considered another comprehensive income item?

Net income, foreign currency adjustments, gains/losses on cash flow hedges, and unrealized gains/losses on certain investments

How would you estimate a company’s net annual cash flow?

Cash inflows from customers - cash outflows for operating costs

What is the balanced scorecard?

A strategic performance management framework that links financial goals with non-financial objectives across four key perspectives: Financial, Customer, Internal Business Processes, and Learning & Growth.

What is the disadvantage of the cash payback technique?

It ignores the expected profitability of the project while also ignoring the time value of money

What amount needs to be reported on the statement of cash flows? Identify the amount reported on the statement of cash flows.

The sum of investing, operating, and financing activities.

What’s the most important category on the statement of cash flows?

Cash flow from operating activities

How it is reported under the statement of cash flows under operating activities. This happened, how are you gonna report it?

Indirect Method (starting with Net Income) or Direct Method (cash receipts/payments)

What is the profitability index and how to calculate it?

Method of comparing alternative projects that takes into account both the size of the
investment and its discounted net cash flows.

𝐏𝐫𝐞𝐬𝐞𝐧𝐭 𝐕𝐚𝐥𝐮𝐞 𝐨𝐟 𝐍𝐞𝐭 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰𝐬 / 𝐈𝐧𝐢𝐭𝐢𝐚𝐥 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭

Based on certain info, the net present value of 0. What does that mean?

Proposal is acceptable, meeting the required rate of return.

Which of the methods ignores the time value of money?

Cash payback method.

How does the cash payback technique work?

Identifies the time period required to recover the cost of capital investment from the net annual cash inflow produced by the investment

Balanced scorecard perspectives.

1. Financial: “How do we look to shareholders?" (e.g., Profit, Revenue Growth)
2. Customer: "How do customers see us?" (e.g., Satisfaction, Market Share)
3. Internal Process: "What must we excel at?" (e.g., Efficiency, Quality)
4. Learning and Growth: “How can we improve?" (e.g., Training, Innovation)

The rate that a company must pay to obtain funds from creditors and stockholders is known as the ____

Cost of capital

Examples that would indicate a company has a low quality of earnings.

• Alternative accounting methods
• Pro forma income
• Improper recognition

Which present value table to use in a certain situation.

For a single one-time use payment:

PV of $1 Table (or Single Sum Table): Use this when you have one future amount to discount back to today, (e.g. lottery payout in 10 years, single future loan repayment)

For a Series of Equal Payments (Annuity)

Present Value of an Ordinary Annuity (PVA) Table: Use for consistent payments made at the end of each period. (e.g., bond interest, lease payments after the first month).

Present Value of an Annuity Due (PVAD) Table: Use for consistent payments made at the beginning of each period (e.g., rent, insurance premiums).

What order do you present the statement of cash flows in?

First Operating Activities, then Investing Activities, and finally Financing Activities

Which of the investment techniques uses discounted cash flows?

Net Present Value (NPV) method and the Internal Rate of Return (IRR) method

What does free cash flow measure?

Provides additional insight regarding a company’s cash-generating ability

Explain the difference between a budget and a standard.

Standard expressed as unit amount
Budgets expressed as total amount

There are different tools to analyze financial statements, which of these items is not one of those tools?

Circular analysis

The three perspectives you would use when analyzing financial statements.

Horizontal analysis, vertical analysis, and ratio analysis.

What would you do when you have a favorable variance and when you have an unfavorable variance?

Must be analyzed to determine underlying factors
Analysis begins by determining the cost components that comprise the variance

Know the additional items that would fall under the quantity of material and price of material.

Quantity of materials: Required materials, Allowance for waste, Allowance for spoilage

Price of material: Purchase price, net of discounts, Freight, Receiving and handling

How to calculate the total material variance?

(Actual Quantity × Actual Price) − (Standard Quantity × Standard Price) = Total Materials Variance

(AQ x AP) - (SQ x SP)

What is the best definition is of sustainable income?

Sustainable income is the most likely level of income to be obtained in the future.

What would you report under the discontinued operation section of an income statement?

The net-of-tax profit or loss from the operations themselves, plus any gain or loss from the actual disposal (sale) of the component (separately from income or loss from continuing operations)

What is the statement of cash flows?

Is one of the four financial statements
Reports
-Cash receipts
-Cash payments
-Net change in cash resulting from operating, investing, and financing activities during a
period

What would management would look for in a variance report?

Significant variances

What information would companies use for making their capital investment calculations?

Companies use a required rate of return equal to its cost of capital (weighted-average rate of return that the firm must pay to obtain funds from creditors and stockholders)

What is the internal rate of return?

Interest rate that will cause present value of the proposed capital expenditure to equal present value of expected net annual cash flows (NPV equal to zero)

What is a company's discount rate based on?

Overall cost of capital

How do you calculate the cash payback period?

Cost of Capital Investment / Net Annual Cash Flow

Which of the following describes the total overhead variance?

Actual Overhead − Overhead Applied = Total Overhead Variance

Who would be interested in the liquidity category in the financial statement analysis?

Short-term creditors (bankers and suppliers) and management

Who would be interested in the solvency category in the financial statement analysis?

Long-term creditors and investors

Who would be interested in the profitability category in the financial statement analysis?

Investors, management, and competitors

How do you calculate the profitability index?

PV of Net Cash Flows / Initial Investment

Operating activities inflows

• From the sale of goods or services
• From interest received and dividends received

Operating activities outflows

• To suppliers for inventory
• To employees for wages
• To government for taxes
• To lenders for interest
• To others for expenses

Investing activities inflows

• From the sale of property, plant, and equipment
• From the sale of investments in debt or equity securities of other entities
• From the collection of principal on loans to other entities

Investing activities outflows

• To purchase property, plant, and equipment
• To purchase investments in debt or equity securities of other entities
• To make loans to other entities

Financing activities inflows

• From the sale of common and preferred stock.
• From issuance of debt (bonds and notes)

Financing activities outflows

• To stockholders as dividends
• To redeem long-term debt or reacquire
capital stock (treasury stock)