DECA Financial Analysis

Everything

List the accounts payable cycle calculations

Accounts Payable Turnover and Days Payable Outstanding (DPO)

AP Turnover

COGS/ Average AP

Days Payable Outstanding (DPO)

365/ AP Turnover. How many days on average you take to pay your suppliers

AR Turnover

Net Credit Sales/ Average AR

Days Sales Outstanding (DSO)

365/ AR Turnover

Cash Conversion Cycle

CCC = DSO + DIO - DPO. How long the business waits to get cash back.

What is wrong with a DSO of 80 and a DPO of 20?

You are collecting slow and paying fast, wasting large amounts of money.

How do you fix long DSO

Tighten credit so that customers have less leverage

How do you fix short DPO

Add more AP

What is DSO in context

How long on average customers take to pay you

What are you deciding with Capital Investment?

Spending money today vs. uncertain future cash flows

What are the methods to analyze capital investments?

Payback Period, Net Present Value (NPV), Internal Rate of Return (IRR), Accounting Rate of Return (ARR), Discounted Break Even

Payback Period Calculation

Payback = Initial Investment/ Annual Cash Inflow

Net Present Value (NPV)

The purpose of this is to discount future cash flows into present value. This really gives you a glimpse into the future to decide if your investment TODAY is worth it.

(NPV) Calculation

Sum of) (CFt)/(1+r)^t - Initial Investment. Summing each year’s cash flows

Internal Rate of Return

This is when NPV = 0. This is how much return you need to break even.

Accounting Rate of Return

Average Annual Profit/ Initial Investment

What IS capital?

The money a company uses to run its business.

What are the components of capital?

Debt- borrowed money. Equity - money from shareholders.

Operating Cash Inflows and Outflows on Capital Investments

Cash Inflows are the net money that you receive each year. Cash outflows are what it takes to maintain the project each year.

Terminal Flows

Cash Inflows/Outflows that occur at the end of a project’s life cycle. Salvage Value and Recovery of working capital usually.

Cost Volume Profit Analysis

Very simple formula. Revenue - Variable Costs - Fixed Costs.

Contribution Margin (CM)

Revenue per unit - variable cost per unit

Break Even Point (BEP)

Fixed Costs/ CM

Job Costing

Costs assigned to specific Jobs or batches

Process Costing

Costs assigned per process or department

Activity Based Costing (ABC)

Assigning overhead based on actual resource use

Absorption vs. Variable Costing

Variable costing only accounts for marginal changes such as variable manufacturing costs and foregoes the fixed costs. Absorption is full costing.

What is standard costing and why is it important?

Standard costs are the building blocks of budgets. It is what things should cost. After the financial period ends, we use standard costs to compare to actual costs for variance analysis. We want favorable variance.

Transfer Pricing

The cost of selling something within a company to other divisions.

Total Quality Management (TQM)

A company-wide commitment to continuous improvement and zero defects across all processes, with a focus on customer satisfaction.

Lean Production

Philosophy focused on eliminating waste to streamline efficiency.

Just-In-Time (JIT)

An inventory management strategy when goods are produced just when they are necessary, eliminating excess inventory.

Theory of Constraints (TOC)

Focuses on eliminating bottlenecks that limit throughput.