21 Jun ACC 400 ( 3 Questions) Financial & Managerial Accounting
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Answer each of the questions below with a minimum of 125 words each.
o QUESTION 1: Although ROI can be a good measure of a company’s performance, there can be some drawbacks to using this measure to base management’s performance. Some argue that having a performance measure like ROI will cause managers to look more to the short term rather than to focus on solid long-term planning.
This scenario was one that I witnessed at my position with the airplane parts manufacturer. In that company, managers changed from one role to another around every 18 months. Because of this, many managers only focused on what they had to do to meet their metrics for the next year or so. Upper management ended up extending the time for managers to be in a role to at least two years. This did help to get managers focused more on the longer term.
Class, what are some other criticisms of using ROI? Do you agree or disagree?
§ QUESTION 2: In order to bypass some of the issues associated with ROI, some companies use alternative measures such as residual income. Residual income (RI) uses the following formula:
RI = Operating Income – (minimum return x invested capital) (Williams, Haka, Bettner & Carcello, 2015)
The residual income calculation allows the company to take into consideration a minimum required rate of return. However, some companies go a step further and calculate Economic Value Added (EVA) in order to get a more precise measure of a company’s performance.
Class, what can the EVA calculation of a company specifically tell us? What are some examples of companies that use EVA?
§ QUESTION 3: It is important to find ways to measure a company’s performance. One of the earliest systems that was developed to help measure a company’s performance is called the DuPont system.
The DuPont system was developed in the early 1900’s to help management monitor the company’s performance not only in the area of profit, but also in terms of investment. The system focuses on Return on Investment (ROI), which is calculated using the following formula:
ROI = Operating Income / Average Total Assets (Williams, Haka, Bettner & Carcello, 2015) Class, are any of you familiar with ROI? Does your company use ROI as a way to measure performance of invested dollars?
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