accounting final exam (chapters M10 and M11)

capital asset

operational asset used for a long period of time

capital investment

acquisition of capital asset

capital budgeting

the process of planning to invest in long term assets in a way that returns the most profit

payback

measures the amount of time it takes to recover the cost of intital investment in terms of net cash inflows

equal cash flows formula

initial investment/amt of annual cash inflows

advantages of payback

• easy

• good for short term investments

disadvantages for payback

• doesnt consider time value of money

• doesnt consider income after break even

Accounting rate of return (ARR)

a capital investment analysis method that measures the overall profitability of the investment

advantages of ARR

considers overall profitability

disadvantages of ARR

• uses accrual accounting

• doesnt consider time value of money

decision rate

does the return meet expecations

net present value (NPV)

a capital investment analysis method that measures the net difference between the present value of investments net cash inflows and investment cost

discount rate

managements minimum desired rate of return on investment

if NPV is 0 or above…

accept

if NPV is below 0…

reject

profitability index (PI)

computes the number of dollar returned for each dollar invested

if PI index is one or greater…

accept (NPV is positive)

if PI index is less than one…

reject (NPV is negative)

centralized company

major planning and control decisions made by top managers

decentralized company

a company is divided into segments, each segment manager makes planning and control decisions

cost center

manager in a cost center is only responsible for costs (evaluate based on if they acheive standards)

revenue center

manager is evaluated by generating revenue

profit center

manager is in charge of managing both costs and generating revenue

investment center

manager is responsible got profit and capital decision

performance evaluation system

provides top managment with a framework for maintaining control over entire system

lag indicators are based on…

past performace

lead indicators are based on…

projections of the future

operational performance measure

non-financial performance measures to evaluate efficiency and effectiveness of the company

• customer satisfaction

• employee satisfaction and retention

balanced score card

performance evaluation system that requires management to consider both financial and operational performance

Different perspectives: financial

how do we look to investors and creditors (increase profit, productivity and growth)

different perspectives: customer

improve value to customer (price, quality, service)

different perspective: internal business

problems with the product (defects), new products to market, number of products sold

different perspectives: learning and growing

returning skilled employees, positive culture, training for employees, employee satisfaction

transfer pricing

amount of goods when the transaction happens between different segments of the company