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Financial Performance Measures

This chapter delves into the empirical evidence and concepts related to financial performance measures, such as Return on Investment, Return on Equity, Internal Rate of Return, and Residual Income. It examines the comparison of profit centers and controllable profits, exploring their impact on overall financial health. Additionally, it discusses Cash Recovery Rate and Stock Market Return as indicators of business success and value creation. The chapter provides insights into measuring and evaluating financial performance from a managerial standpoint.

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Financial Performance Measures

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  1. FinancialPerformance Measures Chapter 8 Managerial Accounting Concepts and Empirical Evidence

  2. Jess Co.Comparison of Profit Centers

  3. Jess Co.Comparison of Profit Centers

  4. Jess Co.Comparison of Profit Centers

  5. Jess Co.Comparison of Profit Centers

  6. Jess Co.Comparison of Profit Centers

  7. Jess Co.Comparison of Profit Centers

  8. Return on Investment AP = Accounting Profits(income) I = Accounting Value of Investments(assets)

  9. Return on Equity ROE (Return on Equity) = AP/SE = [(AP/TR) * (TR/I)] [I/SE ] = (ROI) . (I/SE) AP in above needs to be thought of as NI SE = Stockholders’ Equity

  10. Internal Rate of Return CF0 =initial cost of Investment n = economic life of capital project CFt = net cash flow in period t IRR = internal rate of return

  11. Residual Income AP = accounting profits I = accounting value of investment k = cost of capital

  12. Residual Income and Return on Investment

  13. Jess Co.Comparison of Controllable Profits ROI and RI Based on controllable investment levels of $3,500,00 and $ 5,000,000 in SU1and SU2 respectively Based on controllable investment levels noted before and a capital charge equal to 15% of the subunit investment level

  14. Cash Recovery Rate CFA = annual cash flows from operations GI = gross fixed investments

  15. Stock Market Return Ri,t = stock return for firm i in period t bi = beta (i.e, measure of risk) for firm i Rm,t = market return in period t Rf,t = risk-free return in period t ei,t = error term for firm i in period t

  16. Tobin's q MV = total market value of a firm (including stock and debt) RC = replacement cost of firm’s tangible assets

  17. Market Value Added MV = total market value of a firm (including stock and debt) BK = accounting book value of a firm

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