Flashcards
Chapter 15 Cost Accounting
Cards in this deck (40)
- 1accounting rate of return (ARR)the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow
- 2annuitya series of equal cash flows per period
- 3annuity duea series of equal cash flows being received or paid at the beginning of a period.
- 4capital assetan asset used to generate revenues or cost savings by providing production, distribution, or service capabilities lasting for more than one year.
- 5capital budgeting.a process of evaluating an entity's proposed long-range projects or courses of future activity for the purpose of allocating limited resources to desirable projects.
- 6cash flowthe receipt or disbursement of cash when related to capital budgeting, cash flows arise from the purchase, operation and disposition of a capital asset
- 7compound interesta method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest.
- 8compounding periodthe time between interest computation.
- 9Cost of Capital (COC)the weighted average cost of the various sources of funds that comprise a firm's financial structure.
- 10Discount Ratethe rate of return used to discount future cash flows to their present value amounts; should equal or exceed an organization's weighted average cost of capital.
- 11Discountingthe process of reducing future cash flows to present value amounts
- 12hurdle ratea reestablished rate of return against which other rates of return are measured; is usually the cost of capital rate when used in evaluating capital projects.
- 13financing decisiona judgement made regarding the method of raising funds that will be used to make acquisitions; is based on an entity's ability to issues and service debt and equity securities.
- 14Future Value (FV)the amount to which one or more sums of money invested at a specified interest rate will grow over a specified number of compounding periods.
- 15Hurdle Ratek
- 16independent projectsan investment project that has no specific bearing on any other investment project.
- 17internal rate of return IRRthe expected or actual rate of return from a project based on respectively the assumed or actual cash flows; the discount rate at which the net present value of the cash flows equals zero.
- 18investment decisiona judgement about which assets will be acquired by an entity to achieve its stated objectives.
- 19judgmental methodan informal method of adjusting for risk that allows the decision maker to use logic and reason to decide whether a project provides an acceptable rate of return.
- 20mutually inclusive projectan interrelated series of capital investment the must all be chosen if the primary investment is selected. Often within mutually inclusive business deals, one event must proceed another for the latter to move forward.
- 21mutually exclusive project.when accepting one investment means rejecting other investment opporunties.
- 22net present value NPVthe difference between the present values of all cash inflows and outflows for an investment project
- 23net present value methoda process that uses the discounted cash flows of a project to determine whether the rate of return on that project is equal to higher than or lower than the desired rate of return.
- 24ordinary annunitya series of equal cash flows being received or paid at the end of a period
- 25payback periodthe time required to recoup an original investment through cash flows from a project.
- 26post investment auditthe process of gathering information on the actual results of a capital project and comparing them to the expected results.
- 27preference decisionthe second decision made in capital project evaluation in which projects are ranked according to their impact on the achievement of company objectives
- 28present valuethe amount that one or more future cash flows is worth currently given a specified rate of interest
- 29profitability indexa ratio that compares the present value of net cash flows to the present value of the net investment
- 30reinvestment assumptionsan assumption made about the rate of return that will be earned by intermediate cash flows from a capital project; the net present value and profitability index assume reinvestment at the discount rate; the internal rate of return assumes reinvestment at the IRR.
- 31return on capitalthe recovery of the original investment in a project.
- 32risk-adjusted discount rate methoda formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash in flows to compensate for increased risk.
- 33Riska situation involving exposure to danger.
- 34screening decisionthe first decision made in evaluating capital projects; indicates whether a project is desirable based on some previously established minimum criterion or criteria.
- 35Sensitivity analysisa process of determining the amount of change that must occur in a variable before a different decision would be made.
- 36simple interestinterest is earned only on the original investment or principal amount.
- 37tax benefitequal to the amount of taxes saved.
- 38tax shieldis the reduction in income taxes that results from taking an allowable deduction from taxable income
- 39timelineillustrates the points in time when projected cash flows are received or paid, making it a helpful tool for analyzing cash flows of a capital investment proposal.
- 40time value of moneyidea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.