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Accounting FinalExam

Chapters 10 & 11

QuestionAnswer
decentralization the delegation of freedom to make decisions. The lower in the organization that this freedom exists, the greater the ...
centralization The process by which decision making is concentrated within a particular location or group.
segment autonomy the delegation of decision making power to managers of segments of an organization.
performance metric a specific measure of mgmt accomplishment.
incentives performance-based rewards, both formal & informal, that enhance managerial effort toward organizational goals.
agency theory a theory that deals with contracting between an organization & the managers that it hires to make decisions on its behalf.
return on investment (ROI) a measure of income or profit divided by the investment required to obtain that income or profit.
return on sales income divided by revenue.
capital turnover revenue divided by invested capital.
economic profit (residual income) after-tax operating income less a capital charge.
capital charge company's cost of capital x amount of investment.
cost of capital what a firm must pay to acquire more capital, whether or not it actually has to immediately acquire more capital.
economic value added (EVA) equals adjusted after-tax operating income minus the cost of invested capital multiplied by the adjusted average invested capital.
gross book value the original cost of an asset before deducting accumulated depreciation.
net book value the original cost of an asset less any accumulated depreciation.
transfer price the price that one segment of an organization charges another segment of the same organization for a product or service.
dysfunctional decision any decision that is an conflict with organizational goals.
management by objectives (MBO) the joint formation by a manager and his or her superior of a set of goals and plans for achieving the goals for a forthcoming period.
capital budgeting the long term planning for making and financing investments that affect financial results over a period longer than just the next year.
discounted cash flow models (DCF) a type of capital budgeting model that focuses on cash inflows and outflows while taking into account the time value of money.
net present value method (NPV) a discounted cash flow approach to capital budgeting that computes the present value of all expected future cash flows using a minimum desired rate of return.
required/hurdle/discount rate of return the minimum desired rate of return, based on the firm's cost of capital.
net present value the sum of the present values of all expected cash flows.
internal rate of return model (IRR) a capital budgeting model that determines the interest rate at which the NPV equals zero.
real options model a capital budgeting model that recognizes the value of contingent investments.
total project approach a method for comparing alternatives that computes the total impact on cash flows for each alternative and then converts these total cash flows to their present values.
differential approach a method for comparing alternatives that computes the differences in cash flows between alternatives and then converts these differences in cash flows to their present values.
marginal income tax rate the tax rate paid on additional amounts of pretax income.
accelerated depreciation a pattern of depreciation that charges a larger proportion of an asset's cost to the earlier years & less to later years.
recovery period the number of years over which a company can depreciate an asset for tax purposes.
MACRS the method companies use to depreciate most assets under US income tax laws.
payback time/period the time it will take to recoup, in the form of cash inflows from operations, the initial dollars invested in a project.
accounting/unadjusted rate of return model (ARR) a non-DCF capital budgeting model expressed as the increase in expected average annual operating income divided by the initial required investment.
postaudit a follow up evaluation of capital budgeting decisions.
inflation the decline in the general purchasing power of the monetary unit.
nominal rate quoted market interest rate the includes an inflation element.
Created by: freisak