ACCA P5 flashcards – set 3

See also ACCA P5 Flashcards: Set 1 | Set 2 | Set 3 | Set 4


List eight sources of external information for an organisation

Click to View the Answer
Click to View the Question

* Competitors’ and suppliers’ catalogues and web sites
* The internet (eg search engines such as Google)
* Newspapers, journals, television, radio
* Published accounts
* The stock exchange
* National and market surveys
* Government and industry statistics
* Discussion with customers
* Government publications
* Employees
* Banks

What is strategic benchmarking?

Click to View the Answer
Click to View the Question

Strategic benchmarking: comparing with how other companies compete (not usually industry specific).

What is product benchmarking?

Click to View the Answer
Click to View the Question

Product benchmarking: comparing specific products with those produced by competitors.

Draw the performance prism

Click to View the Answer
Click to View the Question

In respect of assessing performance, what did Fitzgerald and Moon suggest are the three building blocks?

Click to View the Answer
Click to View the Question

* Dimensions
* Standards
* Rewards

In respect of assessing performance, what did Fitzgerald and Moon suggest are the six dimensions that should be measured?

Click to View the Answer
Click to View the Question

* Financial performance
* Competitive performance
* Quality
* Flexibility
* Resource utilisation
* Innovation

What is deducted from NOPAT to give EVA?

Click to View the Answer
Click to View the Question

Capital employed x WACC. This is a notional charge for the use of capital

In the Economic Value Added approach, list five adjustments that are added back to profit after tax to give NOPAT?

Click to View the Answer
Click to View the Question

* Non-cash expenses
* Expenses such as R&D, training and advertising
* Provisions
* Book depreciation (replaced by economic depreciation)
* Goodwill written-off/amortised
* Interest on debt capital (after adjusting for tax relief)

In the Economic Value Added approach, if profits after interest and tax are $10 million, interest is $2 million and the tax rate is 25%, what is NOPAT?

Click to View the Answer
Click to View the Question

Add back the interest after tax ie $1.5 million so NOPAT is $11.5 million

What are the main advantages and disadvantages of using RI as a measure of divisional performance?

Click to View the Answer
Click to View the Question

Advantages:
* Gives decisions goal congruent with group wishes
* Different rates of interest for divisions of different risks
* Uses readily available accounting figures
Disadvantages:
* Poor for comparing divisions of different sizes
* Profits can be manipulated
* Less intuitive to ROI

What are the main advantages and disadvantages of using ROI as a measure of divisional performance?

Click to View the Answer
Click to View the Question

Advantages:
* Can be used to compare divisions of different sizes.
* Acceptable/understandable
* Uses readily available accounting figures

Disadvantages:
* Can lead to dysfunctional decisions
* Profits can be manipulated

Define ‘residual income’?

Click to View the Answer
Click to View the Question

Residual income (RI) is defined as: controllable divisional profit with a deduction of notional (or imputed) interest based on capital employed times cost of capital.

Define ‘return on investment’

Click to View the Answer
Click to View the Question

Return on investment (ROI) is defined as: controllable divisional profit expressed as a percentage of divisional investment.

What is a cost centre, a profit centre and an investment centre?

Click to View the Answer
Click to View the Question

Cost centre: manager is responsible for only costs
Profit centre: manager is responsible for costs and revenues
Investment centre: manager is responsible for costs, revenues and investmenr in non-current assets.

What is divisionalisation?

Click to View the Answer
Click to View the Question

Divisionalisation is where managers of business areas are given a degree of autonomy over decision making i.e. they are given the authority to make decision without reference to senior management. In effect they are allowed to run their part of the business almost as though it were their own company.

What are EBITDA’s strengths and weaknesses?

Click to View the Answer
Click to View the Question

Earnings before interest and tax: before interest to measure the profitability before any distributions to providers and capital, and before tax because tax is not under direct control of management. EBITDA additionally considers profit before depreciation and amortisation to approximate to cash flow, as depreciation and amortisation are non-cash expenses. A major criticism of EBITDA is that it fails to consider the amounts required for fixed asset replacement.

What is EBITDA?

Click to View the Answer
Click to View the Question

EBITDA stands for ‘earnings before interest, taxes, depreciation and amortisation’.

Financial performance measurement depends on comparison.
What are the main bases for comparison?

Click to View the Answer
Click to View the Question

* With previous years for the same company
* With other similar companies
* With industry averages
* Also, possibly, between branches or divisions of the same company

What are the four main categories for financial performance management?

Click to View the Answer
Click to View the Question

Profitability – how well a company performs, given its asset base
Liquidity – the short term financial position of the company
Gearing – the long-term financial position of the company
Investors ratios – how well investors will appraise the company

Explain negative and positive feedback

Click to View the Answer
Click to View the Question

Negative feedback is where the control mechanism reduces any deviation from plans.
Positive feedback seeks to increase a deviation form plan. Eg to ensure that sales increases are repeated

Explain feedforward control

Click to View the Answer
Click to View the Question

Feedforward control is where a problem is identified and corrective action taken, before the problem occurs.

Explain feedback control

Click to View the Answer
Click to View the Question

Feedback control is where the outputs of a process are measured and information is then provided regarding corrective action, after the outputs have been produced.

Explain maximax, maximin and minimax regret

Click to View the Answer
Click to View the Question

These are attitudes to uncertainty.
Maximax: an optimist who expects to get the best possible outcome.
Maximin: a pessimist who expects poor outcomes and seeks to limit those.
Minimax regret: someone who looks backwards and often wishes a different choice had been made. Decisions are made to so as to minimise possible regrets.

What is meant by ‘risk preference’?

Click to View the Answer
Click to View the Question

Risk preference relates to attitude to risk.
A risk seeker will be interested in the best possible outcome, no matter how small the change that they may occur.
Someone who is risk neutral will be concerned with the most likely or ‘average’ outcome.
A risk avoider makes decisions on the basis of the worst possible outcomes that may occur.

What is the difference between ‘risk’ and ‘uncertainty’?

Click to View the Answer
Click to View the Question

Risk exists where a decision maker has knowledge that several possible outcomes are possible – usually due to past experience. This past experience enables the decision maker to estimate the probability or the likely occurrence of each potential future outcome. Uncertainty exists where the future is unknown and where the decision maker has no past experience on which to base predictions.

What is the contingency approach to management?

Click to View the Answer
Click to View the Question

The contingency approach to management accounting is based on the idea that there is no universally appropriate accounting system applicable to all organisations in all circumstances.

What is value analysis?

Click to View the Answer
Click to View the Question

Value analysis tries to reduce costs whilst still delivering the required standard of quality and reliability. The main distinction is between value added and non-value added activities. Value added activities add value to the customer’s perception of a product; non-value added activities do not add value in the eyes of the customer. Costs that do not add value to the product should be targeted for elimination.

What is RFID?

Click to View the Answer
Click to View the Question

Radio frequency identification (RFID) is the use of a wireless non-contact system that uses radio-frequency communication to transfer data from a tag attached to an object, for the purposes of identification and tracking.

In information systems what do MIS, DSS, EIS, ERP and ES refer to?

Click to View the Answer
Click to View the Question

MIS = management information system
DSS = decision support system
EIS = executive information system
ERP = enterprise resource planning
ES = expert system

It is sometimes said that information should comply with the acronym ‘ACCURATE’.

What, typically, do these letters stand for?

Click to View the Answer
Click to View the Question

Accurate,
Complete,
Cost-beneficial,
Understandable/user-targeted,
Relevant,
Adaptable/authoritative,
Timely,
Easy to use.