Financial Performance Measurement Flashcards

Benchmarking financial performance against industry peers is most useful for:

Answer: Identifying relative strengths and weaknesses

Benchmarking reveals how a firm performs relative to competitors, highlighting areas to improve.

A declining asset turnover ratio over several periods most likely indicates:

Answer: Assets are generating less revenue

Falling asset turnover means each dollar of assets is producing less sales revenue.

Which measure adjusts reported earnings to reflect the true economic cost of all capital employed?

Answer: Economic Value Added

EVA deducts a charge for both debt and equity capital, reflecting true economic profit.

When return on investment (ROI) is used to evaluate a division, a manager may reject a profitable project if it:

Answer: Lowers the division's average ROI

ROI-based evaluation can cause goal incongruence when a good project dilutes a high existing ROI.

A trend analysis (horizontal analysis) of financial statements primarily examines:

Answer: Changes in line items over multiple periods

Horizontal analysis tracks how individual line items change across multiple reporting periods.

Which of the following would increase a company's return on equity, all else equal?

Answer: Higher financial leverage

Increasing leverage raises the equity multiplier, boosting ROE when returns exceed borrowing costs.

Vertical (common-size) analysis of an income statement expresses each item as a percentage of:

Answer: Net sales

On a common-size income statement, each line is shown as a percentage of net sales.