10-2-15 Flashcards
The Board of Directors powers are:
- In charge of appointing an independent audit committee.
- Responsible for overseeing the daily operations of the company.
- Hiring/firing of the chief executive officer (CEO).
- Determine the mission of company.
- Decide the declaration/payment of dividends.
The shareholders are the primary stakeholder of any corporation and they have certain rights like the following:
- Right to receive declared dividends.
- Right to inspect books and records.
- Right to keep their ownership level in the company the same if new shares are issued (pre-emptive right).
- Right to sue on company’s behalf if a violation of fiduciary duty occurs (officer not exercising care and due diligence).
- Right to possible cumulative voting rights (stock owner can vote once for each board seat for each share owned).
Business judgment rule
Where a director can not be held liable as long as they exercised care and due diligence.
Duty of loyalty
Where management of company puts the interest of the company ahead of their own.
Articles of Incorporation of a company usually include the following:
- Proposed name and address
- Purpose
- Powers
- Name of registered agent
- Name and address of each incorporator
- Number of authorized shares
Bylaws of a company usually state
When and how officers will be elected; what duties these officers will perform; how many mandatory meetings will take place; and what will be the agenda at these meetings.
The Audit Committee must have at least one financial or accounting expert within its members and the committee does the following:
- Oversees the appointment
- Determines amount of compensation
- Oversee the work performed by the external auditor
- The external auditor must report directly to them and not an officer of the company.
- Audit committee members must all be independent
- Have no direct financial or direct family connections with employees of the company.
The audit committee financial expert must have an understanding of:
- Functions of the audit committee.
- Internal control and procedures of financial reporting for organizations.
- Generally accepted accounting principles (GAAP).
If the audit committee does not have a financial expert then it must give an explanation as to why not.
Dodd Frank Act of 2010 –
- Requires all members of the compensation committee of public companies must be independent.
- Requires public corporations to disclose why or why not the chairman of the board is also the chief executive officer.
- Requires a nonbinding vote by shareholders on extreme pay incentives to top executives at least every three years.
- Rewards may be paid to whistle blowers.
New York Stock Exchange (NYSE) and NASDAQ requirements for corporations
- Majority of directors must be independent.
- Provide how each director independence level was determined to its stockholders.
- Must have an independent audit committee.
- Must have a code of conduct for all employees made public.
- Have regularly scheduled executive sessions.
Internal control’s three objectives or definition–
Organization’s top management supervision and implementation of a plan that should provide reasonable assurance to the (1) reliability of the company’s financial statements; (2) compliance with all laws; and (3) effectiveness and efficiency of the company’s operations. To have an effective internal control process it is essential to implement and follow each of the above components.
Limitations of Internal Control
- Human judgment can be faulty.
- Breakdowns can occur because of human failures such as simple errors or mistakes.
- Circumvention by collusion.
- Management override of internal control.
- Cost constraints (the cost-benefit analysis).
- There are no absolute deterrents to fraud.
Internal control systems fail because controls
- Not designed/implemented properly.
2. Properly designed/ implemented but ineffective because of changes within the organization’s environment.
Evaluators
Individuals who are competent and objective that monitor controls within an organization.
Monitoring for change continuum within an organization
- Control Baseline – serves as the starting point.
- Change identification – identification of a change needed from monitoring.
- Change Management – Design and implementation of the changes needed.
- Control Revalidation/update – continually updating and revalidating controls.
Control environment factors/components for a general organization
- Commitment to competence.
- Top management and their philosophy/operating style.
- Delegation of authority/responsibility.
- H/R policies and procedures.
Five components within internal control structure and they are:
- Control environment – the providing of appropriate surroundings to entice proper structure and policies that will lead to good internal control.
- Control activities – makes sure all policies and procedures of management are undertaken appropriately and are done according to the organizations guidelines.
- Information and Communication – makes sure all information and communication finds it way to the appropriate levels of the organizations employees in a timely manner.
- Monitoring the implemented Controls – continually checking to make sure controls are working properly.
- Risk Assessment – the process management uses to identify; analyze; and respond to internal or external risks
Enterprise risk management (ERM) Committee of sponsoring organization (COSO) and its eight topics
Uses procedures to identify; access; control; and manages organizational governance by providing guidance. It also helps to align the stakeholders of the company risk appetite with that of management.
Eight topics within Enterprise Risk Management and they are:
1. Internal control environment–same as stated in internal control structure above.
2. Objective setting–mission statement stating the goals of the organization in terms of its internal control.
3. Event Identification–controls and potential risks of breaking controls can be identified.
4. Risk assessment–organizational employer can identify risks to internal control. Examples are inherent and residual.
5. Risk Responses–organizational employees know what to do when risks to internal control are present.
6. Control activities–same as stated in internal control structure above.
7. Flow of Information and Communication–same as stated in internal control structure above.
8. Monitoring– same as stated in internal control structure above.
Risk appetite
The amount of risk that is acceptable and the company can still achieve its goals.
Risk tolerance
The acceptable amount of change in a risk or risks that the company is willing to allow.
Risk averse
Where an entity or person will choose between two investments the investment with the less risk.
Risk response examples are
avoidance; reduction; sharing; acceptance
Avoidance
The reduction of risk by avoiding the situation altogether or exiting the situation.
Reduction
The reduction of risk by implementing safeguards to minimize the likelihood/effects of an adverse reaction.
Sharing
Where the reduction of risk by transferring or spreading out the risks.
Acceptance
Where the reduction of risk is not possible and the company accepts it.
The following are advantages of using the ERM framework:
- Improves risk response decisions
- Reduces the operational surprises and losses
- Organization can seize opportunities more easily.
- Deploy capital more easily.
Some limitations of the ERM framework are
The potential for management override; collusion among employees; and there always being an uncertain future for businesses.
Monitoring is the most important aspect of the COSO ERM Model and has three steps to ensure proper monitoring of internal control is performed and they are:
- Structuring organization so employees are assigned job duties according to their capability; objectivity; and authority.
- Design and Implement monitoring controls to get the most output from the controls with the least input.
- Evaluate and Report monitoring controls to proper authorities so that needed actions can take place.
Demand Curve
As the price of a product increases; the quantity demanded by consumer’s decreases and vice versa. If some other variable besides price affects the quantity demanded then it will shift the entire demand curve(causes a change in demand; not quantity demanded) to either the right (if it is positive and increases demand) or to the left (if it is negative and decreases demand).
Factors or variables that may shift the demand curve are
- Price of substitute goods
- Price of complement goods
- Consumer income and wealth
- Consumer tastes change
- The size of the market
Normal goods
Where goods are usually consumed during the course of normal business.
Substitute goods
Where one good can take the place of another without a loss of quality.
Inferior goods
Where one good can take the place of another but there would be a loss of quality.
Complement goods
Where one good is needed or usually consumed in conjunction with another good.
Marginal utility (or sometimes called Marginal Return)
The value or satisfaction to a consumer of the next dollar they would spend on a certain product.
Supply Curve
As the price of a certain product increases; the quantity supplied increases. If some other variable besides price affects the quantity supplied then it will shift the entire supply curve either to the right (if it is positive and increases supply) or to the left (if it is negative and decreases supply).Factors with a positive effect on supply curve: number of producers; government subsidies; price expectations. Factors with a negative effect on supply curve: changes in production costs and prices of other goods.
Price ceilings
Setting price below equilibrium (results in a shortage or quantity demanded exceeding quantity supplied or a shortage). Gives consumers a lower price than what they normally would receive from producers.
Price floors
Setting price above equilibrium (results in a surplus or quantity supplied exceeding quantity demanded). Gives producers a higher price than what they normally would receive for their products.
Perfect (Pure) Competition
Composed of a large number of sellers; the products of each seller are very similar or standardized; the products price must stay within the industry average; and there are very few barriers to entry/exit.
Perfect Monopoly
Usually only has one producer (seller); the product does not have any close substitutes and there are very few restrictions on entering the market. The Demand curve for a perfect monopoly has a negative slope and the only way to increase profits from where they are currently is to advertise more or decrease production costs. Usually not found in United States but can exist because of:
- Increasing returns to scale
- Control over the materials supply
- Patents
- Government franchises (e.g. Russia or China).
Monopolistic Competition
Usually includes lots of producers (sellers); products are differentiated but can be interchanged (substituted) and easy for a firm to enter or leave the market.
Oligopoly
Usually has only a few producers (sellers); products can be similar or non-similar and the market has high restrictions for entry and exit. Usually members of this economy try to avoid changing prices too much to avoid potential price wars between each other.
Gross domestic product (GDP)
The price of all goods and services produced by a domestic economy during the year for sale only in that country; not in another.
Gross national product (GNP)
Includes all goods and services; whether for sale or produced within its boundaries or in another country.
Leading indicator
Starts moving up months before an actual recovery begin. Examples are unemployment rate and housing starts.
Lagging indicator
Starts moving up months after a recovery has begun; and starts declining months after a recession has begun. Example is a consumer price index.
Frictional unemployment
Unemployed who are changing jobs or just entering the work force.
Structural unemployment
Unemployed whose job skills do not match the wants of employers.
Cyclical unemployment
Caused by changes in the business cycle or economy
Absolute advantage
When a country can produce a good or service at a lower cost than another country.
Comparative advantage
When the opportunity costs of producing a certain good or service relative to the opportunity cost of producing other goods is lower in one country than it is in another.
Monetary policy
Where the Federal Reserve central bank of the United States borrows money given to them to hold by depositors and loaned out to individuals and others for spending purposes.
The Federal Reserve can influence the interest rates or monetary policy of the country by
1. Increasing the reserve requirements of banks (decreases the money supply and increases the interest rates).
2. Decreasing the reserve requirements of banks (increases the money supply and decreases the interest rates).
3. Purchase more government securities (increases the money supply and decreases the interest rates).
4. Sell more government securities (decreases the money supply and increases the interest rates).
Fiscal policy
Where the federal government takes actions such as taxes levied; subsidies paid out; and other government spending programs to promote a stable economy.
The federal government can influence the economy and how strong it is by
1. Increasing taxes (decreases the money supply to the general public and generally contracts the economy).
2. Decreasing taxes (increases the money supply to the general public and generally expands the economy).
3. Increase spending (increases the money supply to the general public and generally expands the economy).
4. Decrease spending (decreases the money supply to the general public and generally contracts the economy).
Factors that affect foreign exchange rates:
Inflation – a nation’s currency with a higher inflation rate will decrease in value relative to a country with lower inflation.
Interest rate – a nation’s currency with higher interest rates will increase in value relative to a country with low interest.
Balance of payments – currency in a nation that buys more goods than it sells (net importer) will decrease in value because of less demand for its currency. Currency in a nation that sells more goods than it buys (net exporter) will increase in value because of more demand for its currency.
Government intervention – currency in nation buying its own currency will increase in value and currency in nation that is selling its own currency will decrease in value.
When $1.25 equals 1 Euro instead of it taking $1.30 to equal 1 Euro it means a stronger dollar and you are able to buy more with it.
When $1.50 equals1 Euro instead of it taking $1.45 to equal 1 Euro it means a weaker dollar and you will be able to buy less with it.
Sunk costs
Capital that has been spent and cannot be recovered.
Opportunity costs
Capital that is lost because of the choosing of one alternative over another.
Net present value advantages and disadvantages
Advantages include answer is in dollars and adjusted for the time value of money as well as it considers the total profits for the project. Disadvantages of net present value are that it can be cumbersome to solve for and it does not evaluate management’s decisions when undertaking a project.
