Core 2

Front 1

What is the classification and formula of average collection period?

Back 1

• liquidity
• 365/receivable turnover

Front 2

what is the classification and formula of Inventory turnover ratio?

Back 2

• Liquidity ratio
• COGS/Avg. Inventory

Front 3

What is the classification and formula of price earning ratio?

Back 3

• market price per share / EPS

Front 4

What is the classification and formula of receivable turnover?

Back 4

• liquidity
• Net credit sales/Avg. gross AR

Front 5

What is the classification and formula of EPS?

Back 5

• profitability
• Net earnings-Preferred dividend / shares

Front 6

What is the classification and formula of Free cash flow?

Back 6

• solvency
• cash provided by operating activities - net capital expenditures - Dividends paid
• fundamental basis for stock pricing

Front 7

What is the classification and formula of dividend yield?

Back 7

• profitability
• dividend per share/ market price per share

Front 8

What are the easiest parts to forget in NPV calculation?

Back 8

• if given after-tax required rate of return, also need to use after-tax cash flow
• NPV of tax-shield
• Working capital change: outflow at beginning and inflow at end of the project
• opportunity cost

Front 9

In WACC calculation, use book value or market value to calculate the weight?

Back 9

• Market value

Front 10

What's the difference between yield and coupon?

Back 10

• market vs. book

Front 11

What's IRR and how to make use of it, how to calculate it?

Back 11

• Internal rate of return that makes the NPV=0
• If IRR > minimum required rate of return --> accept
• Using Investment/CF to find annuity factor, then based on period find the rate -> always on a trial and error basis

Front 12

What's the difference between NPV and IRR?

Back 12

• NPV assumes re-investment of cash flows at cost of capital, while IRR assumes re-investment at the specific IRR of the project
• produce different result when comparing two mutually exclusive projects

Front 13

What is MIRR and how to calculate it?

Back 13

• MIRR assumes all CF are reinvested at the firm's cost of capital
• defined as the rate at which the PV of the costs (outflows) is equal to the PV of the inflows moved to the end of the period using the firm's weighted average cost of capital
• Calculation: First FV all CF to the end of the project, then discount the lumpsum amount back to beginning of the period equalling to cost of the investment, figure out the annuity factor, then rate
• Won't have multiple IRRs when CF and unstable like IRR would have.

Front 14

What's the major defects of payback period?

Back 14

• ignores time value of money
• ignores CF beyond payback period

Front 15

What's the major advantage of payback period?

Back 15

• good measure for liquidity and riskiness, given that distant CF is more risky than near CF.
• useful in high risk situations

Front 16

How to calculate Average return of investment?

Back 16

• (Average cash receipts - average annual depreciation) / average lifetime investment
• average lifetime investment = (beginning investment - salvage value) /2

Front 17

What is the Profitability Index used in capital rationing?

Back 17

• PI = NPV / Investment.

Front 18

How to compare Lease vs. Buy decision?

Back 18

• using after-tax CF and after tax rate
• annuity factor: within the same rate column, using last period rate + 1 (as annuity due)

Front 19

What is the advantages and disadvantages of leasing over purchasing?

Back 19

Advantage:

• off balance-sheet if operating lease (no liab.)
• cancellation options in case of obsolescence
• superior maintenance contract
• tax advantage in case of land (can deduct lease payment, while cannot deduct CCA under buy)

Disadvantage:

• no residual value accrued to lessee
• higher interest costs
• cannot take advantage of assets with high CCA rates (no discretion available, have to take the fixed lease payment deduction)

Front 20

What is financial leverage and its measure, impact?

Back 20

• relative emphasis of use of debts in capital structure
• To measure: Debt to equity
• Higher return, higher risk
• When calculate ROI, need to deduct the leverage cost (interest cost)

Front 21

What is operating leverage and its impact?

Back 21

• % of fixed cost used
• Small decrease in sale will result in large decrease in income

Front 22

What is Capital asset pricing model (CAPM) used for and formula?

Back 22

• to calcualte the RRR on an asset
• takes into account asset's sensitivity to market risk
• RRR = Rf + Ba ( Rm - Rf)

Front 23

How to price a share based on dividend pay out and discount rate? (assume 0 growth and certain amount of growth rate)

Back 23

• no growth: Price = dividend / discount rate
• growth: Price = Dividend / (Discount rate - Growth Rate)

Front 24

How to calculate Economic Ordering Quantity (EOQ) ?

Back 24

• Q= square root of (2*Demand*FC perorder / annual carrying cost)

Front 25

Financing option: Common Share?

Back 25

• expensive
• dilute control
• dividend not tax deductible

• no need to pay interest, less risky
• different class of shares

Front 26

Financing option: Preferred Share?

Back 26

• less expensive
• less risky than debt

Front 27

Financing option: Debt?

Back 27

• Interest is tax deductible
• allows financial leverage -> higher return

• risky
• weak BS and potential breach of debt convenants

Front 28

Choose between ST vs. LT debt?

Back 28

• ST usually cheaper
• use ST to lock down lower LT interest rate if expected to go down
• ST can be obtained quickly

Front 29

Asset approach for valuation: Liquidation value?

Back 29

Gross realizable value of assets

Less:

• settlement value of liabilities
• disposal costs (discounted)
• income tax assumed on sale of assets

Front 30

Asset approach for valuation: Adjusted book value?

Back 30

• Asset BV - Liab. BV + Increment/Decrement of FMV change

Front 31

Going concern/transaction-based approaches: capitalzed earnings approach?

Back 31

• value= maintainable earnings * earnings multiplier + redundant assets

Front 32

What is the maintainable earnings used in capitalized earnings approach?

Back 32

• maintainable earnings = pre-tax earnings adjusted for:

1. non recurring
2. owner compensation and fringe benefits
3. indirect owner/operator cost: travel, entertainment, auto etc.
4. NAL transaction
5. income + expenses related to redundant assets (eg. dividend on share investment)
6. tax effects
7. (can be based on PY or average of several PYs)

Front 33

What is the earning multiplier?

Back 33

• 1 over capitalization rate
• higher the rate, lower the multiplier, lower the value

Front 34

What is redundant assets?

Back 34

• assets not used in day to day operations

Front 35

Valuation: capitalized after tax CF?

Back 35

Value=After tax CF * multiplier + redundant assets + present value of tax shield relating to existing assets

Start with: pre-tax maintainable earnings

adjust for:

• non cash items
• subtract tax
• subtract sustaining capital reinvestment (net of tax shield)
• =after tax maintainable earnings

Front 36

Valuation: Discounted CF

Back 36

• similar to capitalized CF but with limited period
• value = sum of:

1. discount back Free Cash Flow
2. discount back terminal value (assume 0 if not given)

Front 37

Valuation: market based approach?

Back 37

• using comparable transactions

Front 38

What budget is the basis of all budgets?

Back 38

• Sales budget

Front 39

What is self-imposed budget?

Back 39

• Management is responsible to prepare their own estimates

Front 40

What is zero-based budgeting?

Back 40

• begins at 0 budget level and must justify all cost as if it is the first time they are incurred
• rank all activities as decision packages
• minimum level of activity for each package
• not incremental

Front 41

What is Fixed OH budget variance and volume variance?

Back 41

• Budget variance = actual FOH - budget FOH
• Volume variance = budget FOH - applied FOH

Front 42

ROA and ROI: which one measure efficiency/profitability?

Back 42

• ROA: efficiency
• ROI: profitability

Front 43

How to calculate Residual Income?

Back 43

• RI = Net operating income - (req. ROR - ave. operating assets)
• RI > 0 --> accept the project

Front 44

What is Total Quality Management?

Back 44

• Produce with extremely low defect rates
• Reduce costs caused by poor quality
• Quality assurance: proactive process
• Quality control: reactive process

Front 45

What is Business Process Management?

Back 45

• use collaboration between IT and employees

Front 46

What is Lean Management?

Back 46

• maintain value with fewer costs
• identify wasteful process and reduce them
• High degree of employee participation
• low level of inventory

Front 47

What are the reasons to consider non-financial performance?

Back 47

• financial measures do not drive value
• often a closer link between non-financial performance and long term strategic objectives
• Non-financial indicators may be better indications of future financial performance
• Non-financial measures tend to be less susceptible to changes in performance measures that are beyond the control of manager or organization

Front 48

What does Balance Scorecard do?

Back 48

• Provides a comprehensive framework which translates a company's vision and strategy into action through objectives and performance measures
• associate outcomes with drivers
• it's not a controlling system, rather, it is used to communicate, inform, and be a continuous learning system

Front 49

What are the 4 aspects of balance scorecard?

Back 49

1. financial
2. customer
3. internal business process
4. learning and growth

Front 50

What are the characteristics of job order costing?

Back 50

• produce a variety of products, one product at a time, in batches
• moves from batch to batch for different products
• Use cost sheet to accumulate the cost associated with the job, RM -> WIP -> FG

Front 51

What are the characteristics of process costing?

Back 51

• averaging costs over a number of similar units
• large number of units involved, each product passes through a series of production steps called processes or departments
• assign cost to the processes
• then average over productive effort of that process or department
• Equivalent units

Front 52

What is Kaizen Costing?

Back 52

• constant improvements
• eliminating non-value added activities

Front 53

What is the product life cycle stages?

Back 53

1. introduction
2. growth
3. maturity
4. decline

Front 54

What stage of product life cycle is most important to reduce cost?

Back 54

• Early stage (Introduction)

Front 55

What is a quality control chart?

Back 55

• used to graph how processes change over time

Front 56

How to calculate interest rate risk exposure?

Back 56

• Compare the PV of the debt at its own interest rate and at market interest rate

Front 57

What is interest coverage ratio?

Back 57

• Income before interest and taxes / Interest

Front 58

What is lean management?

Back 58

• involves participation from all levels
• high employee participation
• increase productivity and cost efficiencies
• use a series of production cells to produce similar products

Front 59

Decentralization

Back 59

• decrease the efficiency
• duplication of efforts
• increased communication costs

Front 60

What is dashboard?

Back 60

• software that displays important system tools available for operating the company's accounting system

Front 61

At what level should governance be performed?

Back 61

• Mainly BOD
• but at many levels in corp as well

Front 62

What is direct labour efficiency variance?

Back 62

• (AQ * BP) - (BQ * BP) as per PASS course
• (AQ * BP) - (Allowed Quantity for actual output * BP) as per UTSC, to be confirmed.