Description
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).
MEASURING AND CONTROLING ASSETS EMPLOYED
Purposes of measuring assets employed:
to provide information for decision making to measure the performance of the business unit focusing on profits without considering the assets employed to generate those profits is an inadequate basis for control unless the amount of assets employed is taken into account it is difficult to compare the profit performance
Purposes of measuring assets employed:
business unit managers have two performance objectives - they should generate adequate profits - they should invest in additional resources only when the investment will produce an adequate return
Measuring assets employed:
what practice will induce business unit managers to use their assets most efficiently? 1. Cash: central control 2. Receivables: BU managers can influence the level of receivables whether to include accounts receivable at selling prices or at cost of goods sold? 3. Inventories: recorded at end-of-period amount advance payments accounts payable
Measuring assets employed:
4. Working capital: Gross working capital net working capital 5. Fixed Assets
EVA vs. ROI:
ROI is a ratio EVA is an amount
EVA vs. ROI:
benefits of ROI
- comprehensive measure anything that affects financial statement is reflected in ROI - simple to calculate, easy to understand, meaningful in an absolute sense - common denominator that can be applied to any unit
- interfirm performance and intrafirm comparison
EVA vs. ROI:
benefits of EVA
- with EVA all business units have the same profit objective for comparable investment ROI provides different incentives for investments across business units a BU currently achieving ROI of 30% would be reluctant to expand unless it is able to earn an ROI of 30% or more on additional assets another BU current ROI 5%, would benefit from anything over 5% ROI creates a bias
EVA vs. ROI:
benefits of EVA
- decisions that increase center’s ROI may decease its coverall profits
EVA vs. ROI:
benefits of EVA
- different interest rates may be used for different types of assets lower interest rate for inventories relatively higher rates for fixed assets
EVA vs. ROI:
benefits of EVA
- EVA has a stronger positive correlation with changes in a company’s market value
several reasons why shareholder value creation is critical best proxy for shareholder value at the BU level is to ask BU managers to create and grow EVA
EVA vs. ROI:
BU Cash Rece- Invent FA ivables ories Total Budget R Investm ed O ents Profit I
1,20,000 1,20,000 1,05,000 75,000 35,000 24,000 14,400 10,500 3,800 (1,800) 20% 12 10 5 (5)
A B C D E
10,000 20,000 15,000 5,000 10,000
20,000 20,000 40,000 10,000 5,000
30,000 30,000 40,000 20,000 10,000
60,000 50,000 10,000 40,000 10,000
EVA vs. ROI
B Bud. U Pr. CA Req. FA Earni ngs 4%
2,400 2,800 3,800 1,400 1,000 60,000 50,000 10,000 40,000 10,000
Req. earni ngs 10%
6,000 5,000 1,000 4,000 1,000
Total Bud. req. EVA earni ngs
8,400 7,800 4,800 5,400 2,000 15,600 6,600 5,700 (1,600) (3,800)
A B C D E
24,000 14,400 10,500 3,800 (1,800)
60,000 70,000 95,000 35,000 25,000
doc_612100845.ppt
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset).
MEASURING AND CONTROLING ASSETS EMPLOYED
Purposes of measuring assets employed:
to provide information for decision making to measure the performance of the business unit focusing on profits without considering the assets employed to generate those profits is an inadequate basis for control unless the amount of assets employed is taken into account it is difficult to compare the profit performance
Purposes of measuring assets employed:
business unit managers have two performance objectives - they should generate adequate profits - they should invest in additional resources only when the investment will produce an adequate return
Measuring assets employed:
what practice will induce business unit managers to use their assets most efficiently? 1. Cash: central control 2. Receivables: BU managers can influence the level of receivables whether to include accounts receivable at selling prices or at cost of goods sold? 3. Inventories: recorded at end-of-period amount advance payments accounts payable
Measuring assets employed:
4. Working capital: Gross working capital net working capital 5. Fixed Assets
EVA vs. ROI:
ROI is a ratio EVA is an amount
EVA vs. ROI:
benefits of ROI
- comprehensive measure anything that affects financial statement is reflected in ROI - simple to calculate, easy to understand, meaningful in an absolute sense - common denominator that can be applied to any unit
- interfirm performance and intrafirm comparison
EVA vs. ROI:
benefits of EVA
- with EVA all business units have the same profit objective for comparable investment ROI provides different incentives for investments across business units a BU currently achieving ROI of 30% would be reluctant to expand unless it is able to earn an ROI of 30% or more on additional assets another BU current ROI 5%, would benefit from anything over 5% ROI creates a bias
EVA vs. ROI:
benefits of EVA
- decisions that increase center’s ROI may decease its coverall profits
EVA vs. ROI:
benefits of EVA
- different interest rates may be used for different types of assets lower interest rate for inventories relatively higher rates for fixed assets
EVA vs. ROI:
benefits of EVA
- EVA has a stronger positive correlation with changes in a company’s market value
several reasons why shareholder value creation is critical best proxy for shareholder value at the BU level is to ask BU managers to create and grow EVA
EVA vs. ROI:
BU Cash Rece- Invent FA ivables ories Total Budget R Investm ed O ents Profit I
1,20,000 1,20,000 1,05,000 75,000 35,000 24,000 14,400 10,500 3,800 (1,800) 20% 12 10 5 (5)
A B C D E
10,000 20,000 15,000 5,000 10,000
20,000 20,000 40,000 10,000 5,000
30,000 30,000 40,000 20,000 10,000
60,000 50,000 10,000 40,000 10,000
EVA vs. ROI
B Bud. U Pr. CA Req. FA Earni ngs 4%
2,400 2,800 3,800 1,400 1,000 60,000 50,000 10,000 40,000 10,000
Req. earni ngs 10%
6,000 5,000 1,000 4,000 1,000
Total Bud. req. EVA earni ngs
8,400 7,800 4,800 5,400 2,000 15,600 6,600 5,700 (1,600) (3,800)
A B C D E
24,000 14,400 10,500 3,800 (1,800)
60,000 70,000 95,000 35,000 25,000
doc_612100845.ppt