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Management Accounting (Fach) / Pros&Cons of Financial Measures (Lektion)
Diese Lektion wurde von Janaw55 erstellt.
Diese Lektion ist leider nicht zum lernen freigegeben.
- Pros&Cons of ROI [most popular measure] Pros Tracks profits AND invested capital Measures effectiveness in invested capital usage If we dont really know the asset base, i.e. start-up If we are making losses Cons: Ignores cost of capital [ as the min.return we get from asset with same risk portfolio ] Bias is facor of Old divisions (depreciated numerator) Sometimes higher for old divisions due to depreciated capital
- How to improve ROI Increase SM [ROS] : Higher profit with sales revenue constant => Cut cost Increase CTR : Decrease invested capital with sales revenue constant => Lower I
- Pros&Cons of Operating Profit Pros: Generally meets criteria of good performance measure: shows how much division contributed to profit Common basis measurement since most divisions compute operating profit Con: Easy to manipulate No consideration for Capital invested
- Pros&Cons of RI Pros: Smoothes out fact that Managers would not invest in ROI Goal congruence in capital allocation decisions Tracks profits & Invested Capital Excess profits from min. required profits Consistent with discounted CF valuation models as it takes into account capital charge = return on investments of similar risky assets Cons: Internal Bias against bigger divisions -> Dont use to compare different-sized divisions Use in conjunction with other measures We need to understand the asset base (difficult i.e. for a start-up firm)
- RI Formula RI = Divisional Profits - Required Profits = Divisional Profits - [Capital Charge • Invested Capital] = Net Income - [Assets • Cost of Capital ] Yes, it would be in her interest since adding the new restaurant will increase the firm’s RI.
- BCS See if improvements in one area came at expense ofanother fights inadequacies of diferent accounting measures, and fact that no clear single measure can provide a good accounting target Minimize information overload
- Pros & Cons of customer satisfaction performance Below par rating: Legitimacy if rated at par Bad signals by an at-par rating Lead indicator of future financial performance Match with strategic focus At par rating Inappropriate Measurement (selection bias?) Maybe no lead indicator of financial performance More sophisticated customer base (lower target) Risk of bad asset allocation
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