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18 Cards in this Set

  • Front
  • Back

What are two methods to evaluate an investment center?

1. ROI

2. Residual Income

Define: Return on Investment

Net operating income / average operating assets

Why is net operating income used in ROI? What is another term for net operating income?

As average operating assets are used. EBIT

How is the average operating assets calculated?

The average of the beginning and ending operating assets

Define: net book value. For what is it used?

Acquisition less accumulated depreciation; used in place of average operating assets

Formula: Return on Invest

The second formula: what links both terms?

1. Ratio of net operating income to average operating assets

2. Operating Margin * Asset Turnover


In what ways can the DuPont ROI be used to improve financial performance.

1. ROI increases by increasing selling price, unit sales or decreasing operating expenses.

2. Excessive funds tied to operating assets decrease ROI.

Regarding management decisions, why is the DuPont ROI useful?

Many decisions affect a combination of changes in sales, expenses and/or operating assets.

Define: residual income. What is it used for? Formula.

The rate at which income is earned above its minimum required rate of return on its average operating assets; investment center performance evaluation

Net Income - (Average operating Assets * Minimum Rate of Return)

What is the advantage of the residual income over the ROI? Example?

It encourages taking on investments profitable for the entire company that is discouraged under ROI.

I.e. projects that rates lower than the current ROI but is still profitable for the entire company.

What is the disadvantage of the residual income? Thus, what is the solution?

It cannot be used to compare firm of different sizes as the larger the firm.

I.e. the larger the firm, the higher its average operating assets and thus its residual income.

Annual % change and ROI.

What are the four performance measures of the balance scorecard? What is the main idea behind this?

1. Financial

2. Customer

3. Internal Business Processes

4. Learning

The lower ones will lead to better performance of higher ones.

Given two companies, is the residual income a good measurement of comparative management performance? Why or why not? If not, what are some solutions?

Not necessarily as both may have different sizes. In such a case, it is not possible to do so.

Either compare ROI or check the annual changes.

What are the arguments of critics of the financial control?

It fails to measure either the drivers (causes) of the financial result and other performance measures of meeting other stakeholder requirements.

What are the benefits of decentralization?

1. Upper-level management can focus on overall strategy.

2. Authority is delegated to more informed lower-level managers

3. Inefficient bureaucratic layers are removed (faster decision making)

4. Trains lower-level managers for higher positions

What are the disadvantages of decentralization?

1. Managers can neglect overall strategy

2. Can introduce office politics and prevent coordination between managers

3. Manager actions can contradict overall objectives (i.e. choose alternatives for own sake)

4. Spreading innovative ideas may be difficult as there is limited communication without central direction.

Define: responsibility center. What are the three types? How are they different?

Any part of an organization where a manager can have control over costs, profits or investments.

1. Cost: only costs

2. Profit: costs with revenue

3. Investment: all three

What are the four types of cost centers?

1. Accounting

2. Legal

3. Finance

4. Administration