Chapter 21 ~ Financial and managerial accounting 18th edition
Chapter 16 ~ Financial and managerial accounting 18th edition
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International Business And Management Studies
Finance & Accounting
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Chapter 25: Rewarding Business Performance
This chapter consists of 6 learning objectives. All six objectives will be discussed
and explained separately. At the end of this summary, an overview with all the
formulas is provided. Good luck studying and I hope you get a good grade!
The main question for this chapter is as following: How to motivate employees
and others inside and outside the organization to help the organization achieve
its goals and objectives.
The answer is, by rewarding goal achievement:
- Financial measures:
o Return on Investment (ROI)
o Residual Income (RI)
o Economic Value Added (EVA)
- Non-financial measures:
o Balanced Scorecard
Learning Objective 25-1: Explain the importance of incentive systems for
motivating performance.
Employees may have goals and objectives that differ from those of the
organization. The incentive systems provide a tool that helps align employee
goals with those of the organization by drawing attention the organization’s
goals. By choosing to measure specific components of performance, and by
rewarding employees for the actual outcomes associated with those
components of performance being measured.
In short: By using the incentive system, the organization can align their goals
with the employees, and reach their goals with motivated employees.
, Learning Objective 25-2: Use the DuPont system to evaluate business
performance.
The DuPont system is one of the first systems to focus on business
performance measurement. The system measures Return on Investment (ROI),
Capital Turnover (CT), and Return on Sales (ROS).
ROI is simply a tool to measure the efficiency in using available resources.
ROI = Operating Income / Average Total Assets
Capital Turnover (CT) tells managers about how well the capital invested in
assets is generating (or ‘turning over’) sales dollars.
CT = Sales / Capital Invested in Assets
Return on Sales (ROS) indicates the operating earnings or profitability that can
be expected from one dollar of sales.
ROS = Earnings / Sales
When knowing Capital Turnover and Return on Sales, ROI can be calculated as:
ROI = CT x ROS
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