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FMA Y3Q2 Summary
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FMA Y3Q2 summary based on powerpoint and related chapters in book
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Finance Y3Q2 notesTable of Contents
Week 1: Chapter 23............................................................................................................1
Week 2...............................................................................................................................6
Week 3: Chapter 5............................................................................................................10
Week 4: Chapter 13..........................................................................................................15
Week 5: Chapter 22..........................................................................................................20
Week 1: Chapter 23
Learning objectives:
, 1. Select financial and non-financial performance measures to use in a balanced
scorecard.
2. Examine accounting-based measures for evaluating business unit performance,
including ROI, RI, and EVA.
3. Analyze the key measurement choices in the design of each performance measure.
4. Study the choice of performance targets and design of feedback mechanisms
5. Indicate the difficulties that occur when the performance of divisions operating in
different countries is compared.
6. Understand the roles of salaries and incentives when rewarding managers
7. Describe the four levers of control and why they are necessary
How to measure and monitor the performance of a company?
Measure: financial or non-financial
Focus areas:
-Financial
-Customer
-Internal Business Processes
-Learning and growth
Decentralization
-Disadvantage: difficult to make sure that every department performs well
, Performance-measurement
Financial performance measures
-Return on investment
-Residual income
-Economic value added
-Return on sales (this measure doesn’t account for investment)
Selecting subunit operating income as a metric is inappropriate because it obviously differs
simply on the different size of the subunits
Designing accounting-based performance
Measures requires several steps:
1. Choose Performance Measures that align with
Top Management’s Financial Goals (Goal Congruence)
2. Choose the Level of Details of each Performance Measure(s).
3. Choose a Target Level of Performance
4. Choose a Feedback Mechanism for each Performance Measure.
Return on Investment (ROI)
-accounting measure of income divided by an accounting measure of investment
-with income we mean operating income (EBIT) when measuring a project or an
organizations subunit
ROI = Income / Investment
ROI advantages and disadvantages
Strengths:
-Blends all the ingredients of profitability (revenues, costs and investment) into a single
percentage
-May be compared to other ROI’s both inside and outside the firm
-It is a ratio
-It doesn’t favor divisions
-It combines revenue, cost and investment into a single number so that managers can
clearly see what can be changed to increase returns
-Easy to calculate and easy to understand
Weaknesses:
-tendency to reject projects that will lower historical ROI even though the prospective ROI
exceeds the required ROI (managers who are evaluated based on ROI have incentives to
reject investments with ROIs below their divisions current average ROI, even when the
investments have positive net present values)
IN PERCENTAGE !!!!
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